Question

Macy's bonds are currently rated BBB-. They have a yield of 8.5%. Treasury bonds with familiar maturity have a yield of approximately 1%. If you reinvest your coupons into the bonds, and if Macy's does not default what is your expected return to maturity on Macy's bonds?

A) Approximately 1%

B) More than 1% but less than 8.5%

C) Approximately 8.5%

D) More than 8.5%

Answer 1

The correct answer is option C

The Yield on the corporate bond is higher as it has to compensate the risk inherent with the bond as it is rated -BBB, While the treasury bonds are issued by the government that is considered as risk free return.

The Yield refers to the annual return that an investor would get if he hold the security, and in this case the yield of treasury bond would have no effect on the yield on corporate bond as the risk and return associated with them are different.