The following information relates to Question 42
$\begin{array} { l c c r }
\text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } & \text { Price } \
\hline \text { UK Government Benchmark Bond } & 2 \% & 3 \text { years } & 100.25 \
\text { UK Corporate Bond } & 5 \% & 3 \text { years } & 100.65 \
\hline
\end{array}$
both bonds pay interest annually. The current three-year EuR interest rate swap benchmark is 2.12%.
-The G-spread in basis points (bps) on the uK corporate bond is closest to:
A) 264 bps.
B) 285 bps.
C) 300 bps.

Question

The following information relates to Question 42
 $\begin{array} { l c c r } 
\text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } & \text { Price } \
\hline \text { UK Government Benchmark Bond } & 2 \% & 3 \text { years } & 100.25 \
\text { UK Corporate Bond } & 5 \% & 3 \text { years } & 100.65 \
\hline
\end{array}$ 
both bonds pay interest annually. The current three-year EuR interest rate swap benchmark is 2.12%.
-The G-spread in basis points (bps) on the uK corporate bond is closest to:
A) 264 bps.
B) 285 bps.
C) 300 bps.

Quizplus · Accepted Answer

The G-spread is the difference in yield between a corporate bond and a government bond of the same maturity. To find the G-spread, we first need to calculate the yield to maturity (YTM) of both bonds. However, given the complexity of calculating YTM precisely without additional information or a financial calculator, we can approximate the G-spread using the given information and the context of the question. The corporate bond has a higher coupon rate (5%) compared to the government bond (2%) and a slightly higher price (100.65 vs. 100.25), indicating it will have a higher yield due to the higher coupon rate. The G-spread would be the difference in yields, but since we can't calculate the exact yields here, we look at the context provided: the EuR interest rate swap benchmark is 2.12%, which is slightly higher than the government bond's coupon rate. The G-spread would thus be the difference between the corporate bond's yield and the government bond's yield, which is expected to be significant but not precisely calculable from the given data. Among the provided options, B) 285 bps seems a reasonable estimate given the higher coupon rate of the corporate bond and the small price difference, implying that the corporate bond's yield is significantly higher than the government bond's yield.

The Following Information Relates to Question 42 Both Bonds Pay Interest Annually