Question:

Credit spread / z-spread Assume Citibank is a bellwether (i.e. a good indicator) for A-rated US corporate financials credit risk. To entice investors to buy its bonds, it issues a 5 year bond, priced at par today, % per annum, payable annually. What is the indicative spread over US Treasuries (the z-spread) for 5 year A-rated US corporate financials debt if the US government term structure is given to you in the form of :

a. a set of US govt par rates C(n) (assume annual pay), where C(1).50%, C(2).0%, C(3).5%, C(4).0%, C(5).5%. Suggest you use excel to do this and a reminder to keep enough decimal places to show the TA you understand the question. Is the spread equal to : coupon C(5) = 4% - 2.5% .5% ?

b. a set of US govt spot rates, annual compounding z₁= 0.50%, z₂= 1.0%, z₃= 1.5%, z₄= 2.0%, z₅= 2.5%. Suggest you use excel to do this and a reminder to keep enough decimal places to show the TA you understand the question.