The Next Two Problems Require the Bond Yield Spread Matrix

question 21

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 5-year noncallable corporate bond that is rated "B" by S&P, given also that the yield on 5-year Treasuries is 4.44%.

• A)4.15%
• B)6.15%
• C)8.59%
• D)10.59%

---

Definitions:

Jobs Argument

A perspective or argument centered on the impacts of economic policies or business decisions on employment levels.

Infant-Industry

An economic rationale for trade protectionism arguing that new industries need to be shielded from international competition to allow them to grow and become competitive.

Infant-Industry Argument

The justification for protective tariffs to shield emerging domestic industries from international competition until they become competitive.

Free Trade

The policy of allowing goods and services to be traded between countries with few or no restrictions or tariffs.