Corporate Bonds

Archive for December, 2008

Question: does state bond have the higher interest rate than corporate bond?

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

Answer: c) Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.

July 29, 2010 - Rep. Doggett's Remarks on Closing Tax Loopholes and Rebuilding America

Question: Spread between Treasury and Corporate Bonds?

I've been keeping track of a 30 yr. A rated Target corporate bond and the comparable 30 yr. Treasury bond. I've kept the data in a spreadsheet and I enter data every 3-4 trading days for that particular day. My professor said that the spread should remain about the same or else the risk profile of the co. or the markets has changed. My question is: How much change is considered "enough" to say the risk profile has changed in terms of actual numbers? For example, sometimes the spread moves 2 or 4 basis points. Would that be considered too much for the spread to "remain the same"? 12 basis points? For example, the spread in one week was 2.2% followed by 2.24%. Would the 4 basis point change be within the "acceptable range" of the spread being about the same? Much thanks in advance.

Answer: 50bps would be my threshold for "enough". However to really get an idea, I recommend you look at the historical data. I don't know if you have access to bloomberg or a similar software, but you can get the historical data on the yields going back decades, using that information you can figure out what the long term average is and the standard deviation, and then figure out based on the history when a move would be considered large. For example I used to track the long term average of the 10 year vs. the ML HY Master II Yield to Worst (commonly referred to as the high yield spread) on a monthly basis and the long term average of that spread is 500bps, a 50bps move is not unusual but 100bps would be considered significant. To do this though you need to choose a standard time period for the data, either daily (not recommended), weekly, monthly (that's what I used), or annually (not recommended) Just a thought.

Investors Beware!