The following represents two yield curves.
$\begin{array} { | l r r | }
\hline \text { Maturity } & \text { Pure Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year } & 3 \text { percent } & 6\text { percent }\
2 \text { year } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year?

Question

The following represents two yield curves.
 $\begin{array} { | l r r | } 
\hline \text { Maturity } & \text { Pure  Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline  & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year  } & 3 \text { percent } & 6\text { percent }\
2 \text { year  } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year?

Quizplus · Accepted Answer

11efb883_b673_bf53_ba2a_27d4cc2c2cc0_TB1314_00 The spread between B-rated corporate bonds and Treasury bonds with the same maturity is currently 6 percent. If the maturity is one year, then the B-rated corporate bond yield is expected to increase by 6 percent in one year, while the Treasury bond yield is expected to increase by 3 percent. Therefore, the expected spread between the one-year maturity B-rated bond and the one-year Treasury bond in one year is 6% - 3% = 3%. Adding this spread to the current one-year Treasury yield of 3% gives an expected one-year B-rated bond yield of 6%. Therefore, the best option is B, with a spread of 3% and an expected yield of 6%.

The Following Represents Two Yield Curves -What Spread Is Expected Between the One-Year Maturity B-Rated Bond