In Workout A here we're being asked, "Use the information below to calculate the spread over treasuries for a one-year bond". So the important thing to remember here, of course, is that we have to calculate spreads on the basis of same time to maturity. So we have to compare the AA one year, with the treasury one year. So the AA one year spread over treasuries, of course here will be the 3.75, because that's the one year, minus the one year treasury yield, which is 3%. So the spread here, 0.75% or 75 bips. Now let's look at workout B.

The risk premia for a selected investment grade ratings is shown below, along with the risk free rate of return. What is the expected yield to maturity for a BBB rated bond? What is the price of a five year zero coupon bond issued by a BBB rated entity. if we assume that the face value of each bond is 100? What if the bond was downgraded to BBB-? Well, first of all, let's figure out the expected yield to maturity for a BBB rated bond here. Well, we know that the risk-free rate of return is 1.75% and we know that the credit spread is expected to be 1.1% here. So we expect the yield to maturity for BBB rated bond to be 2.85%.

Now, of course, the price of that bond is very simple to calculate. It's a zero coupon bond so it's gonna be 100 times one divided by one, plus the yield to maturity to the power of five because it has five years to maturity. So the price there, 86.9. What if the bond was downgraded to BBB-? Well, we would have a different yield to maturity, of course. It's downgraded so we would of course expect a higher yield to maturity. So what's it gonna be? Well, the risk-free rate is the same, but now the credit spread is a lot higher. BBB-, it's 1.5%. So we expect a yield to maturity for the BBB- rated bond to be 3.25. Let's do the price 100 times one divided by one plus the yield to maturity to the power of five, and we get 85.2. So of course there's significantly lower price here for the BBB- rated bond.