Bond valuation, [1] Bond Valuation (a) Compute the price /

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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Bond valuation

Reference no: EM13831658

Reference no: EM13831658

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