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The following table summarizes the yields to maturity on several one-year, zero-coupon securities:
Security Yield (%)
Treasury 3.13
AAA corporate 3.27
BBB corporate 4.27
B corporate 4.94
a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating?
b. What is the credit spread on AAA-rated corporate bonds?
c. What is the credit spread on B-rated corporate bonds?
d. How does the credit spread change with the bond rating? Why?
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