Below are examples of bonds issued by BHP Billiton and Rio Tinto. Calculate the credit risk premium based on the current yields for each bond.

Assumptions

Bid Price: 127

Offer Price: 129

Yield to Maturity (Offer): 2.39%

(Note: Use a comparable 20 year risk free proxy ie US treasury yield for calculation)

Source: Bloomberg

Assumptions

Bid Price: 127.5

Offer Price: 130

Yield to Maturity (Offer): 2.36%

(Note: Use a comparable 20 year risk free proxy ie US treasury yield for calculation)

Source: Bloomberg

Calculate the bid/offer spread of each bond. Which bond has higher liquidity risk?

(5 Marks)

Au Issuer Information Name BHP BILLITON FIN USA LTD Industry Metals and Mining (BCLASS) Security Information Mkt Iss Global Country AU Currency USD Rank Sr Unsecured Series Coupon 4.125000 Type Fixed Cpn Freq s/A Day Cnt 30/360 Iss Price 98.25800 Maturity 02/24/2042 BULLET Iss Sprd +102.00bp vs T 31 11/15/41 Calc Type (1) STREET CONVENTION Pricing Date 02/21/2012 Interest Accrual Date 02/24/2012 1st Settle Date 02/24/2012 1st Coupon Date 08/24/2012 Identifiers ID Number EJ0387187 CUSIP 055451AR9 ISIN USO55451AR98 Bond Ratings Moody's AZ S&P Fitch Composite A Issuance & Trading Amt Issued/Outstanding USD 1,000,000.00 (M)/ USD 1,000,000.00 (M) Min Piece/Increment 2,000.00 / 1,000.00 Par Amount 1,000.00 Book Runner JOINT LEADS Reporting TRACE + Issuer Information Name RIO TINTO FIN USA PLC Industry Metals and Mining (BCLASS) Security Information Mkt Iss Global Country GB Currency USD Rank Sr Unsecured Series Coupon 4.125000 Type Fixed Cpn Fred S/A Day Cnt 30/360 Iss Price 97.34600 Maturity 08/21/2042 MAKE WHOLE @25.000000 until 02/21/42/ CALL Iss Sprd +135.00bp vs T 3 05/15/42 Calc Type (1) STREET CONVENTION Pricing Date 08/16/2012 Interest Accrual Date 08/21/2012 1st Settle Date 08/21/2012 1st Coupon Date 02/21/2013 Identifiers ID Number EJ3294661 CUSIP 76720AAGI ISIN US76720AAG 13 Bond Ratings Moody's A2 S&P A Fitch Au Composite A Issuance & Trading Amt Issued/Outstanding USD 750,000.00 (M)/ USD 750,000.00 (M) Min Piece/Increment 2,000.00 / 1,000.00 Par Amount 1.000.00 Book Runner JOINT LEADS Reporting TRACE