Question

The thirty-year US Treasury bond has a 2.5% coupon and yields 3.3%. What is its price?

A thirty-year corporate bond with a 4% coupon is priced at par. Is it possible for the corporate bond to have a higher price than the Treasury? How is the corporate bond’s “spread” quoted? Both bonds are 100 face and semi-annual

Answer 1

As in this case, It is possible to have a higher price for a coupon bond for a treasury bond. This is so because the bond is priced at par and therefore the discount rate is same as the coupon rate while as the over all interest rate is higher than the coupon rate of the treasury bond, the same is priced below par. Had the coupon rate been same as corporate bond, the price of treasury would have been higher because the discount rate for the same would be 3.3% as compare to 4% in case of corporate bond.

Credit spread or the corporate bond spread is the higher yield that needs to be paid to the corporate bond holder to assume higher risks as compared to the treasury, which is essentially default free. The difference between the yields is the credit spread. In this case it would be 4-3.3 = 0.07%