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[1] Bond Valuation
(a) Compute the price / yield of the following bonds.
(b) Indicate which bond experiences the biggest price change (in percentage terms) when yields decrease by 2%.
Issuer
FIAT
Airbus
Settlement
Today
Coupon
5.25%
3.75%
Frequency coupon payment
1
Maturity
6 years from now
30 years from now
Face value
100
Yield
….
4.55%
Price
€97.67
New Yield
New Price
Price change in %
[2] Synthetic credit rating and synthetic spread
The following companies have no bonds outstanding. To find their cost of debt, you need to take an indirect route. Find the missing numbers in the table below. The risk free rate is 1.22%.
Company
Operating Income
Interest expense
Int.coverage ratio
Synthetic rating
Cost of debt
rD
Company D
$14,431
$11,331
Company E
$200,062
$47,822
Company F
$7,321
$4,457
Company G
$87,452
$9,620
Company H
$16,929
$21,421
Interest
Credit
coverage
Rating
Spread
ratio
over risk-free rate
Higher than 9
AAA
0.60%
6.51 - 8.90
AA
0.80%
4.01 - 6.50
A
1.00%
2.56 - 4.00
BBB
2.00%
2.21- 2.55
BB
3.00%
1.48-2.20
B
4.50%
1.01 - 1.47
CCC
6.50%
0.81 - 1.00
CC
7.50%
0.59 - 0.80
C
10.00%
Low than.59
D
20.00%
[4] Credit Default Swaps
The table below shows quotes by Credit Suisse for CDS prices for bonds issued by the sovereign governments of Armenia, Georgia and Kazakhstan. The bank is a “market maker” in Credit Default Swaps: it buys and sells protection. JPMorgan has excessive short-term exposure to Armenia and to Georgia, and wants to reduce it through the CDS market. It calls Credit Suisse.
1 year
3 years
Armenia
3.24% /3.77%
4.01% / 4.22%
Georgia
2.27% / 2.46%
2.75% / 2.95%
Kazakhstan
0.99% / 1.17%
1.23% / 1.46%
JPMorgan buys a €20 million one-year protection on Armenia; it also buys €9 million three-year protection on Georgia. In order to make the purchase of this protection cheaper, based on its more favorable long-term view on Kazakhstan,JPMorgan decides to sell €25 million three-year protection on Kazakhstan. What is the net annual premium payment made by JPMorgan to Credit Suisse in the first year? Please show your calculations.
a) € 730,000
b) € 712,000
c) € 938,200
d) € 307,500
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