Determines the yield-to-maturity of the bond

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Reference no: EM132065911

Consider a Brady bond issued by Mexico with 5 years left to maturity, paying a coupon of 10%. Only the par value is collateralized by American Treasury bonds. Assume that the U.S. spot rate is 5% for all maturities. The face value is $100 and the price of the bond is 93.

a. Calculate the present value of the collateral.

b. Write down the equation that determines the (stripped) yield-to-maturity of the bond.

c. Write down the equation that estimates Mexican government’s default probability p every period.

Reference no: EM132065911

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