The following table summarizes the yields to maturity on severalone-year, zero-couponsecurities:

Security

Yield (%)

Treasury

3.06

3.06

AAA corporate

3.11

3.11

BBB corporate

4.19

4.19

B corporate

4.83

4.83

a. What is the price(expressed as a percentage of the facevalue) of aone-year, zero-coupon corporate bond with a AAArating?

b. What is the credit spread onAAA-rated corporatebonds?

c. What is the credit spread onB-rated corporatebonds?

d. How does the credit spread change with the bondrating? Why?

a. What is the price(expressed as a percentage of the facevalue) of aone-year, zero-coupon corporate bond with a AAArating?

The price of this bond will be

nothing

%. (Round to three decimalplaces.)

b. What is the credit spread onAAA-rated corporatebonds?

The credit spread onAAA-rated corporate bonds is

nothing

%. (Round to two decimalplaces.)

c. What is the credit spread onB-rated corporatebonds?

The credit spread onB-rated corporate bonds is

nothing

%. (Round to two decimalplaces.)

d. How does the credit spread change with the bondrating? Why?(Select the best choicebelow.)

A.

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

B.

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