Use the following information to answer the question(s) below. a) What is the cr

Question

Use the following information to answer the question(s) below.

a) What is the credit spread on AAA-rated corporate bonds?

b) Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon rate of 7%, and a face value of $1000. Wyatt Oil believes it can get a BBB rating from Standard and Poor's for this bond issue. If Wyatt Oil is successful in getting a BBB rating, what is the issue price for these bonds?

security term(yrs) yield(%) Treasury 20 5.5% AAA Corporate 20 7% BBB Corporate 20 8% B Corporate 20 9.6%

Explanation / Answer

A) THE CREDIT SPREAD ON AAA-RATED CORPORATE BONDS=SPREAD=7.0%-5.5%=1.5%

B) FACE VALUE= $1000

N= 40

I= 4

PMT=35

PV=901.04

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