Question

The firm has a credit rating of A.
You notice that the credit spread for 10-year maturity debt is 90basis points (0.90%).

face value is $100 & interests are paid semi-annually

Your firm’s ten-year debt has a coupon rate of 5%.

You see that new 10-year Treasury notes are being issued at par with a coupon rate of 4.5%.

What should the price of your outstanding 10-year bonds be?

show your workflow please.

Answer 1

Credit spread of a bind refers to the difference between yield rate and quotted rate of return. It is a kind of risk premium over other bonds in market. Since the treasury bill is of same time maturity period, it can use the same credit spread rate and hence the yield rate is 4.5+0.9 = 5.4%

Hence the price = $4.5 payable annually (As noting is given, assumed annual payment for convinience), to be present valued at 5.4% + Present value maturity at 10 years

Price = 4.5*(1+1.054^-10)/0.054 + 100*1.054^-10 = 93.183