Question

The yield on a 10-year US Treasury bond is 2.5%. ABC Co. and XYZ Co. each issue a 10-year bond. ABC’s bond has a yield of 3.5%; while XYZ’s bond has a yield of 5%. Select the statement below that BEST describes this situation.

Group of answer choices

The credit spread of XYZ’s bond is 5%.

XYZ Co. should have greater maturity risk than ABC Co.

XYZ Co. should have a higher credit rating than ABC Co.

The credit spread of ABC's bond is 1%; and XYZ Co. should have greater default risk than ABC Co.

The credit spread of ABC’s bond is 3.5%.

Answer 1

The following Answers are correct :-

The credit Risk of ABC bond is 1% and XYZ Co. should have greater default risk than ABC Co.

XYZ Co. should have greater maturity risk than ABC Co.

Now,

Credit Spread is the difference between the yield of US Treasury Bond and another company security, both having same maturity period.

The yield of 10 year US Treasury Bond is 2.5% and yield of 10 year ABC Co bond is 3.5%

Thus. Spread = 3.5% - 2.5% = 1%

Now, as XYZ Co. has to offer greater yield , that is of 5%. it indicated that it carries higher default risk as well as maturity risk as compared to ABC Co.