Based on info below, what’s the current market price of a $1000 par, option-free, zero coupon corporate bond maturing in 5 years? Years, Treasury Spot Rate%, Credit Spread% 1, 3, 0.2 2, 3.5, 0.3 3, 4, 0.4 4, 4.5, 0.5 5, 5, 0.6 I’m not sure what I/Y to use. Thx.
hmm. i’m not sure how to do this. my best guess is since it’s a zero, there are no coupons to discount, so discount the face at 1.05^5 giving you 783.53. then you need to incorporate the credit spread to account for the default risk of the corporate and i have no idea how to do that. maybe you add the credit spread to the 5% before discounting - so discount 1000 by 1.056^5 giving you 761.52.
=1000/(1.056/2)^10
duh yeah, divide by 2 and to the 10th. stupid me.
Don’t you have to discount the bond back using each spot rate?
if it had coupon payments, you would discount the coupon payments. because you do not receive cash until the bond matures, you only need to use that spot rate
makes sense, thanks. I’ve never seen a question yet where you have to add the credit spread to the yield, that’s a new one.