Question #13
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 5
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
5%, 15-year, annual pay option-free Xeleon Corp bond trades at a market price of $95.72 per $100 par. The government spot rate curve is flat at 5%. The Z-spread on Xeleon Corp bond is closest to:
Answer Choices:
A. 300 bps
B. 325 bps
C. 250 bps
Explanation
Since the spot rate curve is flat, we can simply compute the yield on the bond and subtract
the spot rate from it to obtain the Z-spread.
PV = - 95.72; N = 15; PMT = 7.50; FV = 100; I/Y=?=8%.
Z-spread = 8% - 5% = 3% or 300bps