Bond ratings are indicators of default risk. The yield spread of risky bonds over default-free Treasury bonds does not increase smoothly as rating classes change. Bonds rating scales are available at:

1. Using a Web browser, go to www.investinginbonds.com and locate the most actively traded corporate bonds.
2. Locate bonds in each bond rating categories ranging from AA to junk status. Note the yield to maturity for each bond identified.
3. Calculate the spread between the yield to maturity for each set of sequential categories.
4. What do the spread differences indicate to you about default risk as one considers bonds in ever-riskier categories?

Many bond yield calculators are available online. Yahoo! offers a variety of calculators at bonds.yahoo.com/calculator.html. (The yields that you get with these calculators may vary slightly from values calculated on a financial calculator because of different timing assumptions concerning receipt of the final coupon payment.)

1. Use the "What Price Should I Pay" feature for the following conditions:

   Yield to Maturity You Desire	6%
   Face Value	1,000
   Coupon Rate	4.25%
   Today's Market Rate	5.25%
   Months to Maturity	60

   1. What would be the market value?
   2. What price would you need to pay to provide a 6% return?
2. Use "What Is My Current Yield on Coupon Income Received?" for the following conditions:

   Bond Price Today (% of Face)	102%
   Face Value	1,000
   Coupon Rate	5.65%
   Your Federal Tax Rate	36%
   Your State Tax Rate	8%

   Select "corporate bond" for type of bond.
   1. What is your current yield before taxes?
   2. What is your current yield after taxes?