Explanation

The G-spread is the difference between the yield to maturity (YTM) of a corporate bond and the YTM of a government bond with the same maturity.

Step 1: Calculate YTM for the government bond

Government bond: Coupon = 3%, Price = 101, Years = 2, Annual compounding

Using the bond pricing formula: $101 = \frac{3}{(1 + r)^1} + \frac{103}{(1 + r)^2}$

Solving for r (YTM): Let r = 2.5%: PV = 3/(1.025) + 103/(1.025)^2 = 2.9268 + 98.049 = 100.976 ≈ 101 So YTM_gov ≈ 2.5%

Step 2: Calculate YTM for the corporate bond

Corporate bond: Coupon = 5%, Price = 102, Years = 2, Annual compounding

Using the bond pricing formula: $102 = \frac{5}{(1 + r)^1} + \frac{105}{(1 + r)^2}$

Solving for r (YTM): Let r = 3.96%: PV = 5/(1.0396) + 105/(1.0396)^2 = 4.809 + 97.191 = 102.000 So YTM_corp ≈ 3.96%

Step 3: Calculate G-spread

G-spread = YTM_corp - YTM_gov = 3.96% - 2.50% = 1.46% = 146 basis points

Verification with more precise calculation:

Using financial calculator or Excel:

• Government bond YTM: N=2, PV=-101, PMT=3, FV=100 → I/Y = 2.48%
• Corporate bond YTM: N=2, PV=-102, PMT=5, FV=100 → I/Y = 3.94%
• G-spread = 3.94% - 2.48% = 1.46% = 146 bps

Therefore, the G-spread is closest to 146 bps, which corresponds to option A.