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Defaultable Bonds and Credit Default Swaps
You want to value bonds and credit default swaps of XYZ Widgets. Based on extensive historical data on comparable widget firms, you have determined the risk-neutral survival probabilities. You also observe the term structure of (annually compounded) interest rates.
Suppose that the firm issues a bond paying 6% coupons (annually) with a face value of $1000. The bond is 5 years to maturity. What is the value of this bond? Assume that there is no recovery if the bond defaults.
Suppose that the bond in (1) is hard to buy. Instead, you decide to sell protection via a 5-year credit default swap. The CDS will have annual CDS premium payments on a notional amount of $1000. Assume that there is no recovery if the bond defaults. You decide to follow the historical convention of no upfront payment. What is the required CDS premium?
If you instead want to structure the contract so that buyers of the insurance have to pay $100 upfront, what CDS premium could you charge?
Creative Computing sells a tablet computer called the Protab. Indicated below whether each item is a separate performance obligation and allocate the transaction price of 80,000 Protab Packages to the separate performance obligations in the contract.
According to the spending multiplier (for a small open economy), by how much will domestic product and income change? - What is the change in the country's imports?
The current price of a non-dividend paying stock is $50. Use a two-step tree to value a European call option on the stock with a strike price of $48 that expires in 6 months. Each step is 3 months, the risk free rate is 5% per annum, and the volatili..
Cooling Tools, Inc. is currently producing 1,436 of small refrigerators per month but the company's CEO plans to increase production at a rate of 5.20 % per month until the firm is producing 6.449 of refrigerators per month. How many months will this..
Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. At a 5.2 percent discount rate, what are these payments worth to you on the day you enter college?
Two-state put option value: S0=100, X=115; 1+r=1.10. The two possibilities for S(T) are 125 and 85. what is the hedge ratio of the put? given that the stock currently is selling at 100, compute the value of the put option.
A project has the following estimated data: price = $72 per unit; variable costs = $46 per unit; fixed costs = $21,000; required return = 15 percent; initial investment = $42,000; life = six years. Ignoring the effect of taxes, what is the accounting..
Project Cash Flows You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 per unit and sales volume to be 1,000 units in year 1; 1,2..
Can finance be a good tool to set direction when managing people? Can it be used to communicate vision (a desired future state of something) better? Can finance be used to manage outcomes (of projects/initiaitves) more effectively in a company?
Guy's Mills announced this morning that its next annual dividend will be decreased to $1.60 a share and that all future dividends will be decreased by an additional 2 percent annually. The stock price after the announcement was $21.20 a share. What i..
Suppose Pt follows the geometric Brownian motion dPt = - Derive a stochastic diffusion equation for Ft,T.
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $500 per month. You will charge 1.55 percent per month interest on the overdue balance. If the current balance is $14,500, how long..
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