The Next Two Problems Require the Bond Yield Spread Matrix

question 10

Multiple Choice

The next two problems require the bond yield spread matrix given below:
$$\begin{array}{l}\text { A BOND YIELD SPREAD MATRIX (basis points) }\\\begin{array} {| l | c | c | c | c | c | c | c | } \hline { \text { S\&P Rating } } & \text { AAA } & \text { AA } & \text { A } & \text { BBB } & \text { BB } & \text { B } & \text { CCC } \\\hline \text { Maturity } < = 10 \text { yrs; Non callable } & 34 & 52 & 69 & 107 & 236 & 415 & 687 \\\text { Maturity } < = 10 \text { yrs; Callable } & 58 & 72 & 102 & 150 & 304 & 456 & 530 \\\text { Maturity } > 10 \text { yrs; Noncallable } & 53 & 72 & 92 & 129 & 236 & 233 & \text { n/a } \\\text { Maturity } > 10 \text { yrs; Callable } & 110 & 106 & 131 & 166 & 290 & 433 & 530 \\\hline\end{array}\end{array}$$
-Using the bond yield spread matrix above, calculate the fair yield on a 20-year callable corporate bond that is rated "BBB" by S&P, given also that the yield on 20-year Treasuries is 5.55%.

• A)1.66%
• B)7.21%
• C)6.54%
• D)8.89%

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Definitions:

Financial Leverage

The use of borrowed money to increase the potential return of an investment, which also increases the risk of loss.

EPS

Earnings Per Share, a measure of a company's profitability calculated by dividing its net earnings by the number of outstanding shares.

Earnings Per Share

A company's net income divided by the number of its outstanding shares, indicating the company's profitability on a per-share basis.

Debt

An amount of money borrowed by one party from another, typically repaid with interest.