Explanation:
The coupon rate on the bond issue is 18%, and it offers a spread of 800 basis points (or 8%) over the corresponding 15-year Treasury issue. The spread is simply the difference between the bond's yield and the benchmark Treasury yield. Therefore, the 15-year Treasury rate = Coupon rate - Spread = 18% - 8% = 10%. (Note: A total return swap details mentioned are extra distractors).
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Q.94 Next week, Global Tech has declared its intention to bring to the market a 15-year senior bond issue at par with a coupon rate of 18%, offering a spread of 800 basis points over the corresponding 15-year Treasury issue. An investor is keen to enter into a total return swap that matures in one year with the senior bonds that are about to be issued as the reference obligation. Under the terms of the contract, payments will be exchanged semiannually, where the total return receiver will pay the six-month Treasury rate plus 350 basis points. What is the 15-year Treasury rate at the time the bonds are issued?
A
8%
B
2%
C
10%
D
4.5
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