Financial Risk Manager Part 2
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A 10-year, 3.5% fixed-rate USD-denominated bullet bond issued by Bank TBT, which has an A- credit rating and no embedded options, makes semi-annual coupon payments and has 4.5 years remaining until it matures. Given the bond's yield to maturity is 4.67%, determine the interpolated spread (i-spread). Use the following data for comparison:
- The closest-maturity on-the-run Treasury note's yield: 1.15%
- 4-year Treasury note's yield: 1.65%
- 5-year Treasury note's yield: 2.08%
- Linearly interpolated 4.5-year swap rate: 1.94%
- Z-spread: 316 basis points
Exam-Like
A
151bps
B
273bps
C
352 bps
D
431bps
Explanation:
The i-spread is calculated by taking the difference between the interpolated yield and the yield on the credit-risky bond. In this case, the interpolated yield is determined by the linearly interpolated 4.5-year swap rate, which is 1.94%. The yield on the credit-risky bond, which is the bond issued by Bank TBT, is given as 4.67%. Therefore, the i-spread is calculated as follows:
i-spread = Yield on the credit-risky bond - Interpolated yield i-spread = 4.67% - 1.94% i-spread = 2.73%
This is equivalent to 273 basis points (bps), which corresponds to option B in the provided answer choices. Hence, the correct answer is B: 273 bps.
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