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The current return on 8-year treasury bonds is 4.2%. X Co has equivalent
bonds in issue but has a BBB rating. What is the expected yield on X’s
bondsanswer
From the table the credit spread for a BBB rated, 7-year bond is 126. The
spread for a 10-year bond is 149.
This would suggest an adjustment of
126 + (149 – 126)/3i did not understand this adjustment,can u explain the logic or concept of it.i understood it is to find the 8th year spreak but the logic behind that calculation?
10 year bonds mature 3 years later than 7 year bonds and so the difference in the credit spreads of 149 – 126 is for 3 months. This is therefore (149 – 126) /3 per month.
The 8 year bond is 1 month more than a 7 year bond, and so the credit spread will be for 1 month more that the 7 year bond, which is 126 + ((149-126)/3)
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