Author Question: Consider a Sears zero coupon bond and a US Treasury zero coupon bond both maturing in ten years. The ... (Read 152 times)

anjilletteb · **on:** Apr 25, 2021

Consider a Sears zero coupon bond and a US Treasury zero coupon 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 are the anticipated price changes for the two bonds?
◦ Sears - $11.21, Gov't + $12.45
◦ Sears + $11.21, Gov't - $12.45
◦ Sears + $11.21, Gov't + $12.45
◦ Sears - $11.21, Gov't - $12.45

jgranad15 · **Reply #1 on:** Apr 25, 2021

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