You are an intern with First Bank, and have been asked to develop estimates for yield spreads that would be appropriate for corporate bonds or loans with different maturities and credit ratings To get a rough idea, you decide to start looking at recent data from the bond market Begin by finding the current U S Treasury yield curve At the Treasury Web site (www treas gov), search using the term yield curve and select Daily Treasury Yield Curve Rates Copy the most recent rates for the 1 year through 30 year Treasury bonds into Excel and plot the current Treasury yield curve Find the current yields for bonds issued by Microsoft Corporation Go to finra markets morningstar com BondCenter Using the Search tab, choose Corporate for the bond type and enter Microsoft for the issuer name Sort the bonds by maturity and note the yields for bonds maturing within 1 to 30 years Add a plot of these yields to your graph of the Treasury yield curve, and label it using Microsofts current bond rating You can use Excels trendline feature to plot a smooth curve through these points (Hint Try different polynomial trendlines to find one that seems to provide a reasonably smooth approximation of the data ) Note These bonds may differ somewhat in seniority or have features such as call provisions that cause their yields to vary Also, the quotes provided are based on the most recent trades, but the timing of those trades may differ across bonds For these reasons, bonds with similar maturity and rating may have different yields Fitting a trendline through the points provides a rough estimate of the average yields we might expect for each maturity Repeat the analysis in Step 2 for CVS Health What is CVS Healths current bond rating How does its yield curve differ Repeat the analysis again for Boeing Corporation (search for Boeing Co) How does its yield curve compare with the previous ones Using the yield curves you have found, estimate the value of an annuity that pays $1000 every 5 years over the next 25 years (i e , five total payments) paid by either the U S Treasury, Microsoft, CVS, or Boeing What is the implied yield to maturity for each security ( Note While the yields you have plotted are for coupon bonds, because coupon rates are relatively low, you decide to treat them as zero coupon yields for this estimation, as you feel the estimation error from such an approximation is small relative to the other noise in the data )

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 20, 2024

You are an intern with First Bank, and have been asked to develop estimates for yield spreads that would be appropriate for corporate bonds or

You are an intern with First Bank, and have been asked to develop estimates for yield spreads that would be appropriate for corporate bonds or loans with different maturities and credit ratings. To get a rough idea, you decide to start looking at recent data from the bond market.

Begin by finding the current U.S. Treasury yield curve. At the Treasury Web site (www.treas.gov), search using the term yield curve and select Daily Treasury Yield Curve Rates. Copy the most recent rates for the 1-year through 30-year Treasury bonds into Excel and plot the current Treasury yield curve.
Find the current yields for bonds issued by Microsoft Corporation. Go to finra-markets.morningstar.com/BondCenter/. Using the Search tab, choose Corporate for the bond type and enter Microsoft for the issuer name. Sort the bonds by maturity and note the yields for bonds maturing within 1 to 30 years. Add a plot of these yields to your graph of the Treasury yield curve, and label it using Microsofts current bond rating. You can use Excels trendline feature to plot a smooth curve through these points. (Hint : Try different polynomial trendlines to find one that seems to provide a reasonably smooth approximation of the data.)
Note: These bonds may differ somewhat in seniority or have features such as call provisions that cause their yields to vary. Also, the quotes provided are based on the most recent trades, but the timing of those trades may differ across bonds. For these reasons, bonds with similar maturity and rating may have different yields. Fitting a trendline through the points provides a rough estimate of the average yields we might expect for each maturity.
Repeat the analysis in Step 2 for CVS Health. What is CVS Healths current bond rating? How does its yield curve differ?
Repeat the analysis again for Boeing Corporation (search for Boeing Co). How does its yield curve compare with the previous ones?
Using the yield curves you have found, estimate the value of an annuity that pays $1000 every 5 years over the next 25 years (i.e., five total payments) paid by either the U.S. Treasury, Microsoft, CVS, or Boeing. What is the implied yield to maturity for each security? (Note: While the yields you have plotted are for coupon bonds, because coupon rates are relatively low, you decide to treat them as zero-coupon yields for this estimation, as you feel the estimation error from such an approximation is small relative to the other noise in the data.)