Question

Consider a five year credit default swap with notional value $1 billion on a bond with risk neutral probability of default = 4% and loss given default = 30%. In the event of default, the protection seller must pay to the protection buy an amount equal to the notional value multiplied times LGD. Assume that all cash flows occur at the end of a year.

Estimate the CDS spread (that is, the annual percent of face
value to be paid by protection buyer to protection seller).

Suppose that one year later a bad recession begins and the risk
neutral probability of default rises to 10%, What is the value of
this CDS to the protection buyer?

Answer #1

Extra detail is also provided with proper explanation.

20
A portfolio manager purchased $4.5MM of credit default swap
protection for International Co. with a maturity of 5 years.
International Co’s credit spread was 380 basis points when
initially purchased but it widened to 520 basis points at the end
of the first year. Give the rough calculation of the profit for the
portfolio manager (ignoring the time value of money).
Review Later
$252,000
$170,000
$420,000
$555,000

) Consider a 4-year, 5% annual coupon bond with a face value of
$10,000, which was issued three years ago. The bond just paid the
coupon. Therefore, this bond has one year to maturity, and the next
payment of the face and coupon will be made in exactly one year,
after which the bond will cease to exist. If the bond defaults
before next year, it will pay total of $8,000 in one year. The
effective 1-year risk-free rate is...

Consider a 4-year, 5% annual coupon
bond with a face value of $10,000, which was issued three years
ago. The bond just paid the coupon. Therefore, this bond has one
year to maturity, and the next payment of the face and coupon will
be made in exactly one year, after which the bond will cease to
exist. If the bond defaults before next year, it will pay total of
$8,000 in one year. The effective 1-year risk-free rate is 3.55%....

(a) Consider a 14-year, 9.5%
corporate bond with face value $10,000. Assume that the bond pays
semi-annual coupons. Compute the fair value of the bond today if
the nominal yield-to-maturity is 11% compounded semi-annually.
(b) Consider a 11-year,
corporate bond with face value $1,000 that pays semi-annual coupon.
With the nominal yield-to-maturity equal to 10%, the bond is
selling at $802.5550. Find the coupon rate for this bond. Assume
that the market is in equilibrium so that the fair value...

QUESTION 1
Suppose that you want to hedge your long position in Colombian
hard currency debt buy buying 5-year Credit Default Swap (CDS)
protection. The notional amount you want to hedge is US$50 million
and the CDS trades at 200 bps. How much will be your quarterly
payment to the seller of CDS?
Formula: Quarterly Premium = Notional x Swap Rate (in decimal) x
(92/360)
A.
US$1 million
B.
US$55,555.37
C.
US$255,555.56
D.
US$246,575.34
E.
US$250,000
QUESTION 2
The sudden...

Please read the article and answear about
questions.
Determining the Value of the Business
After you have completed a thorough and exacting investigation,
you need to analyze all the infor- mation you have gathered. This
is the time to consult with your business, financial, and legal
advis- ers to arrive at an estimate of the value of the business.
Outside advisers are impartial and are more likely to see the bad
things about the business than are you. You should...

Delta airlines case study
Global strategy. Describe the current global
strategy and provide evidence about how the firms resources
incompetencies support the given pressures regarding costs and
local responsiveness. Describe entry modes have they usually used,
and whether they are appropriate for the given strategy. Any key
issues in their global strategy?
casestudy:
Atlanta, June 17, 2014. Sea of Delta employees and their
families swarmed between food trucks, amusement park booths, and
entertainment venues that were scattered throughout what would...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 20 minutes ago

asked 36 minutes ago

asked 45 minutes ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago