Four years ago, the relative yield spread between ten-year A-rated corporate securities with no embedded options, and ten-year on-1he-run U.S. Treasuries, was
27.5%. Currently, the nominal yield on ten-year A-rated corporate securities is 5.45%, and the yield on ten-year on-the-run U.S. Treasuries is 4.10%. Calculate the current relative yield spread, and, assuming that any change in the yield spread is due to changes in the credit spread, identify whether the economy has most likely weakened or strengthened over the past four years.
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A. B. C.A
To calculate the current relative yield spread, we need to subtract the yield on ten-year on-the-run U.S. Treasuries from the yield on ten-year A-rated corporate securities.
Given: Nominal yield on ten-year A-rated corporate securities = 5.45% Yield on ten-year on-the-run U.S. Treasuries = 4.10%
Current relative yield spread = Yield on A-rated corporate securities - Yield on U.S. Treasuries = 5.45% - 4.10% = 1.35%
So, the current relative yield spread is 1.35%.
Now, let's analyze the changes in the yield spread to determine whether the economy has weakened or strengthened over the past four years.
Four years ago, the relative yield spread was 27.5%. The current yield spread is 1.35%. The change in the yield spread can be attributed to changes in the credit spread.
If the current yield spread is lower than the yield spread four years ago, it means that the credit spread has decreased, indicating an improvement in the creditworthiness of A-rated corporate securities relative to U.S. Treasuries. This suggests that the economy has likely strengthened over the past four years.
Looking at the provided answer choices:
A. The current yield spread is 32.9%, indicating that the economy has weakened. B. The current yield spread is 32.9%, indicating that the economy has strengthened. C. The current yield spread is 24.8%, indicating that the economy has strengthened.
None of the answer choices match the correct calculation and analysis. The correct answer should be:
D. The current yield spread is 1.35%, indicating that the economy has strengthened.
Please note that this is a hypothetical exam question, and the analysis and conclusions are based on the information provided in the question. In real-world scenarios, economic conditions and factors affecting yield spreads can be more complex and varied.