a) Calculate the premium on BAA rated bonds relative to AAA rated bonds.

b) Why is there a dierence between the yields on these securities?

c) What would likely happen to the premium you calculated above if the economy entered a recession? Explain.

Consider the following information about the yields on AAA rated and BAA rates securities for the past year:/ 1 Mo 3.51 2 Mo 3 Mo 3.55 3.82 4 Mo 3.87 10 Mo 3.98 11 Mo 4.14 12 Mo 4.22 Yields on AAA rated bonds 5 Mo 6 Mo 7 Mo 8 Mo 9 Mo 3.85 4.00 3.96 3.87 3.88 Yields on BAA rated bonds 5 Mo 6 Mo 7 Mo 8 Mo 9 Mo 4.67 4.83 4.83 4.79 4.77 1 Mo 4.22 2 Mo 4.26 3 Mo 4.51 4 Mo 4.64 10 Mo 11 Mo 4.88 5.07 12 Mo 5.22