Question 2 (9 marks) a) Explain why a credit rating is important to a corporate and a government? Also, why it is an important issue to investors? (4 marks) b) What is the YTM of a 4-year default-free security with a face value of $1000 and an annual coupon rate of 5.25% closest to? Assume that the current price is $1034. (2 marks) c) What is the price today of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 5.75%? Does this bond trade at a discount, premium, or at par? Assume that YTM is 5.5% (1 mark) d) The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value). What is the yield to maturity for the two-year zero-coupon bond? Based upon the information provided, what can you conclude in terms of the yield curve? Explain your conclusion. (2 marks) Maturity (years) 1 2 3 4 5 Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35 Round your answers to 2 decimal places. Question 2 (9 marks) a) Explain why a credit rating is important to a corporate and a government? Also, why it is an important issue to investors? (4 marks) b) What is the YTM of a 4-year default-free security with a face value of $1000 and an annual coupon rate of 5.25% closest to? Assume that the current price is $1034. (2 marks) c) What is the price today of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 5.75%? Does this bond trade at a discount, premium, or at par? Assume that YTM is 5.5% (1 mark) d) The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value). What is the yield to maturity for the two-year zero-coupon bond? Based upon the information provided, what can you conclude in terms of the yield curve? Explain your conclusion. (2 marks) Maturity (years) 1 2 3 4 5 Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35 Round your answers to 2 decimal places
