Question

16. What is the difference between an investment grade bond and a junk bond?

4.On October 5, 2019, you purchase a $10,000 T-note that matures on August 15, 2031 (settlement occurs one day after purchase, so you receive actual ownership of the bond on October 6, 2019). The coupon rate on the T-note is 4.375 percent and the current price quoted on the bond is 105.250 percent. The last coupon payment occurred on May 15, 2019 (144 days before settlement), and the next coupon payment will be paid on November 15, 2019 (40 days from settlement).

1. Calculate the accrued interest due to the seller from the buyer at settlement.

2. Calculate the dirty price of this transaction.

12. Use the bond pricing formula and Table 6–6 (Links to an external site.)Links to an external site. to calculate the number of years (to the nearest 1/1000th of a year) between the May 25, 2016, settlement date and the maturity date on the City of New York general obligation bonds maturing on March 1, 2039. The YTM, 3.40 percent, is rounded from 3.40083577 percent.

Answer 1

16). An investment grade bond means that the default risk for the bond is low. A junk bond means that the associated default risk is quite high. Bond rating firms such as Standard & Poor, Moody's give ratings to bonds. Usually, bonds with a rating of AAA/AA are considered of high credit quality, A/BBB are considered of medium credit quality and bonds with ratings below these (BB/B/CCC) are considered of low credit quality.