Q. 1 Go to the St. Louis Federal Rese... [FREE SOLUTION]

Chapter 6: Q. 1 (page 189)

Go to the St. Louis Federal Reserve FRED database, and find data on Moody鈥檚 Aaa corporate bond yield (AAA) and Moody鈥檚 Baa corporate bond yield (BAA). Download the data into a spreadsheet.
a. Calculate the spread (difference) between the Baa and Aaa corporate bond yields for the most recent month of data available. What does this difference represent?
b. Calculate the spread again, for the same month but one year prior, and compare the result to your answer to part (a). What do your answers say about how the risk premium has changed over the past year?
c. Identify the month of highest and lowest spreads since the beginning of the year 2000. How do these spreads compare to the most current spread data available? Interpret the results.

Short Answer

Expert verified

A corporate bond yielded $4.07$ percent in September $2017$ , according to available data, while a B corporate bond yielded $5.34$ percent. As a result, there is a $1.27$ difference between them. The B bond is a risky investment. As a result, it will have a greater yield rate than an A bond.

Step by step solution

Definition

The fixed amount of income investment that is handed to the entity for a particular period of time is referred as bond.

Explanation (part a)

According to the available data the month September $2017$ , A corporate bond yield $4.07 %$ and B corporate bond yields $5.34 %$ . Thus, there is a localid="1647026968392" $1.27 %$ spread between them. B bond is riskier. Thus, it will have a higher yield rate as compared to A bond.

Explanation (part b)

According to the available data for the month September $2016$ , a corporate bond yields $4.11 %$ and B corporate bond yields role="math" localid="1647027058887" $4.80 %$ . thus, there is a $0.69 %$ spread between them. Whereas, in September $2017$ , A corporate yield $4.07 %$ and B corporate bond yields $5.34 %$ and there is a $1.27$ spread. Therefore, the risk premium fell.

Explanation (part c)

From the beginning of the year $2000$ , the month with highest spread was December 2008 with $3.33 %$ yield, and the month to lowest spread was June $2014$ with $0.55 %$ yield. According to the most recent data, there is arole="math" localid="1647027261260" $1.27 %$ spread. Thus, it lies between the highest and the lowest spread.