Bond valuation

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Reference no: EM13831658

 [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

Today

 

 

 

Coupon

5.25%

3.75%

 

 

 

Frequency coupon payment

1

1

 

 

 

Maturity

6 years from now

30 years from now

 

 

 

Face value

100

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

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

Reference no: EM13831658

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