An analyst has gathered the following information: Bond A is an 11% annual coupon bond currently trading at 106.385 and matures in 3 years. The yield-to-maturity (YTM) for Bond A is 8.50%. The YTM for a Treasury bond that matures in 3-years is 7.65%. 1, 2, and 3-year spot rates are 5.0%, 6.5% and 8.25%, respectively.
Which of the following statements regarding spreads on bond A is CORRECT? A)
| The nominal spread is approximately 25 basis points. |
| B)
| The Z-spread is approximately 85 basis points. |
| C)
| The nominal spread is approximately 85 basis points. |
|
The nominal spread is 8.50% − 7.65% = 0.85%. Note that the Z-spread, calculated by trial and error, is approximately 48 basis points. |