he following table summarizes the yields to maturity on several one-year, zero-coupon securities:

Security

Yield (%)

Treasury

3.07

AAA corporate

3.12

BBB corporate

4.16

B corporate

4.84

.

a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating?

b. What is the credit spread on AAA-rated corporate bonds?

c. What is the credit spread on B-rated corporate bonds?

d. How does the credit spread change with the bond rating? Why?

Question content area bottom

Part 1

a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating?

The price of this bond will be

enter your response here%.

(Round to three decimal places.)

Part 2

b. What is the credit spread on AAA-rated corporate bonds?

The credit spread on AAA-rated corporate bonds is

enter your response here%.

(Round to two decimal places.)

Part 3

c. What is the credit spread on B-rated corporate bonds?

The credit spread on B-rated corporate bonds is

enter your response here%.

(Round to two decimal places.)

Part 4

d. How does the credit spread change with the bond rating? Why?(Select the best choice below.)

A.

The credit spread increases as the bond rating falls because lower-rated bonds are riskier.

B.

The credit spread decreases as the bond rating falls because lower-rated bonds are riskier.

C.

The credit spread decreases as the bond rating rises because higher-rated bonds are riskier.

D.

The credit spread increases as the bond rating rises because higher-rated bonds are riskier.