Yield and Yield Spread Measures: practice question
A bond of Pellworth Communications matures in exactly seven years and yields 6.12%. On-the-run government bonds yield 4.62% for five years and 5.29% for ten years. Using linear interpolation between the government benchmarks, the G-spread on the corporate bond is closest to:
- 83 bp
- 123 bp
- 150 bp
Show answer and explanation
Correct answer: B
Working: 7-year benchmark = 4.62 + (2/5) × (5.29 − 4.62) = 4.89%; G-spread = 6.12 − 4.89 = 1.23% ≈ 123 bp
Explanation: The seven-year benchmark is interpolated between the five- and ten-year yields: 4.62 + (2/5) × (5.29 − 4.62) = 4.89, so the G-spread is 6.12 − 4.89 = 1.23% ≈ 123 bp. Using the ten-year government yield instead gives 83 bp and using the five-year gives 150 bp; both skip the required interpolation step.
More Fixed Income practice Try a mock exam
More free Fixed Income questions
- Peltarine Energy has issued an inverse floating-rate note whose coupon rate each period equals…
- The managers of a scholarship fund buy newly issued 12-year zero-coupon bonds of Windmere Telecom,…
- Tarnfield Savings holds a pool of fully amortising residential loans whose borrowers may repay…
- A 6% semiannual-pay bond issued by Corvale Bank pays 3.00 per 100 of par each period and is quoted…