You are trying to find the correct yield spread for a Standard and Poor's rated A+,7-year maturity bond.You find that a 7-year maturity,AA- bond's spread is 65 basis points while that of a 7-year maturity A bond's spread is 80 basis points.Which of the following should be a possibility for the spread of the A+ rated bond?

Question

Quizplus · Accepted Answer

Since the A rated bond has a spread of 80 basis points and the AA- bond has a spread of 65 basis points, we know that the A+ bond should have a spread that is higher than 65 basis points and lower than 80 basis points. Option A, which is 64 basis points, is lower than the spread of the AA- bond and therefore cannot be correct. Option C, which is 80 basis points, is the spread of the A bond and cannot be the spread of the higher-rated A+ bond. Therefore, the only possible answer is option B, which is 70 basis points, which sits between the two given bond spreads.

You Are Trying to Find the Correct Yield Spread for a Standard