Suppose you observed that one-year T-bills are trading with a YTM of 4.75 percent.The yield spread between AAA- and BB-rated corporate bonds is 130 basis points.The maturity yield differential between the one-year T-bills and three-year government bonds is 45 basis points.
A) What is the market yield you would expect on a three-year BB-rated corporate bond that pays a 7.25 annual coupon?
B) How much would you pay for this three-year BB-rated corporate bond if its coupon rate was 7.25%?
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