Suppose there are 1-yeear zero-coupon treasury bonds with a face value of $1000 and a yield to maturity of 2%. Suppose there is also a 1-year zero-coupon corporate bond with a face value of

$1000 and a yield to maturity of 7%.

a)What is the spread between these two bonds and is that spread a risk premium or a term premium?

b)Suppose there is an increase in the default risk for the corporate bond. Briefly explain what we would expect to happen to the yield to maturity on these bonds and whatwould happen to theirprices?

c)Based on the event in part b), will the spread between these bonds increase ordecrease?