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 AA- bond has a spread of 65 basis points and the A bond has a spread of 80 basis points, we can conclude that the A+ bond, which is rated between the two, should have a spread somewhere in between. Therefore, 70 basis points is a reasonable possibility for the spread of the A+ rated bond. Option A (64 basis points) is lower than the spread of the AA- bond. Option C (80 basis points) is the spread of the A bond, which is lower rated than the A+ bond, so it is less likely for the A+ bond to have the same spread. Option D is not correct as option C is not a possible spread for the A+ bond.

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