# AAA And Bb Case

Satisfactory Essays

Q1: Ch 7 (10%) An inflation-indexed Treasury bond has a par value of \$5,000 and a coupon rate of 7 percent. An investor purchases this bond and holds it for one year. During the year, the consumer price index decreases by 1.5 percent first six months of the year, and by 2.25 percent during the second six months of the year due to a deflation. What are the total interest payments the investor will receive during the year? The bond coupon rate =7% Per value = \$5000 Therefore the interest payable =5000x 7% The investor will receive =\$350 At 6 month payment the investor should get =350/2 …show more content…

Is the difference larger between AAA and BBB or the BBB and CCC spreads? Difference in AAA and BBB =80 basic points In BBB and CCC = 480 basic points Therefore the difference is large in BBB and CCC than in AAA and BBB .
b. What does this tell you about the perceived risk of the bonds in these rating categories? The difference between the BBB/CCC rating spreads is much bigger than the spreads in the AAA/BBB ratings, hence the perceived risk in CCC rated corporation s will be greater than for the rated corporation in BBB.
Q5: Ch 8 (15%) Compare the AAA spread for a short-term maturity (such as two years) versus a long-term maturity (such as 10 years).
a. Is the spread larger for the short-term or the long-term maturity? AAA spread for 2 years =45 basic points AAA spread for 10 years =85 basic points Therefore the basic points in bonds will be bigger during the 10th year as compared to the 2nd year.
b. Offer an explanation for this. The perceived risk of the spreads will be greater during the 10th year than in the 2nd