Author Question: Consider a Sears 9% bond and a US Treasury 9.25% bond both maturing in ten years. The current yield ... (Read 71 times)

WWatsford · **on:** Apr 25, 2021

Consider a Sears 9% bond and a US Treasury 9.25% bond both maturing in ten years. The current yield to maturity on the Sears bond is 5.3% compared to the Gov't bond yield of 4.5%. The higher yield on the Sears bond reflects Sears's higher probability of default. Historically, the difference between the yields of the two bonds has been 1.2%. This difference is called the "yield spread." Today the yield spread is only 0.8%. You expect that the yield spread will widen back to its historic value over the next few days. Assume that both yields will change equally to bring the spread back to its historic position and assume that the mid-point of the spread will stay where it is. What positions do you take in the two bonds to profit from the expected changes?
◦ Buy Sears, Sell Gov't
◦ Buy Sears, Buy Gov't
◦ Sell Sears, Buy Gov't
◦ Sell Sears, Sell Gov't

cloudre37 · **Reply #1 on:** Apr 25, 2021

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