Financial Market

Term Structure of Interest Rates. Using the below information for BB rated Euro- 80 denominated global corporate debt (ECP is Euro commercial paper) extract the relevant spot rates to generate a BB corporate yield curve. Note that the maturities are exactly as stated and that corporate debt securities issued in the offshore markets, i.e., London or Luxemburg, typically pay interest only once a year.

(a) Corporate yield curve in the global EUR market:

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Type Maturity Coupon Price Yield

ECP 91 days 98.768

ECP 182 days 96.860

Euro-Bond 1 year 8 100.934

Euro-Note 2 years 6 97.760

Euro-Note Strip 3 years 81.401

(b) Draw the corresponding BB yield curve and indicate a hypothetical AAA German Bund term structure, the anchor market for EUR-denominated debt markets, as the relevant sovereign strip yield curve.

(c) What is the relationship between the German sovereign (discount) yield curve and the BB corporate one? Reason by analogy with the US markets and explain.

(d) The Eurozone, i.e., the countries sharing the Euro (EUR) as their common currency, have been in the midst of a long-running debt crisis brought about by sovereign over borrowing, various banking crises, and lax tax collection and enforcement. As a fixed-income strategist for a major mutual fund, you wonder about the wisdom to invest in Greek bonds and collect the relevant data. What is the current German 10Y yield, the corresponding Greek 10Y yield, and the spread between Greek and German 10Y yields? How would you characterize spread and what does it say about market expectations regarding Greek debt?