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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?
What mistakes are commonly made when estimating the WACC, and how do these mistakes arise?
A piece of newly purchased industrial equipment costs $978,000 and is classified as seven-year property under MACRS. The MACRS depreciation schedule is shown in Table 10.7. Calculate the annual depreciation allowances and end-of-the-year book values ..
You are an investor who studies the price movements of stock to identify patterns that are repetitive. By doing this, you have been able to earn higher returns than normal. This would be a violation of:
Scot and Vidia, married taxpayers, earn $184,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule). This year, Fred and Wilma sold their home (sales price $750,000; cost $200,000). Al..
You have just made a $1,500 contribution to your individual retirement account. Assume you earn a rate of return of 8.7 percent and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would b..
A medical college of Virginia located in the urban city of Richmond, Virginia has a wage of 1.8579. a student from nearby Virginia Commonwealth university has just been treated for viral meningitis during a 5 day length of stay (LOS) DRG weight: 1.53..
Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 6.6%. Now, with 6 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has in..
Evaluate at least (2) factors that make financial statement analysis essential to management, investors, and creditors. Provide a rationale for your response. Imagine you are considering investing in a corporation. Examine the key information you wou..
Boards of directors may be legally restricted in their declaration of dividends if: A. cash must be borrowed for the dividend payment. B. dividends have increased substantially over a short period of time. C. the dividend would create a situation of ..
Prepare Washington's balance sheet at December 31, 2014, complete with its proper heading. Use the accounting equation to compute retained earnings.
Suppose that Lil John Industries’ equity is currently selling for $34 per share and that 2.7 million shares are outstanding. The firm also has 57,000 bonds outstanding, which are selling at 102 percent of par. Which type of security (stocks or bonds)..
Discuss the pros and cons of financing in unhedged Eurodollars instead of via Euroeuros. As you do this you must give consideration to the foreign exchange risks associated with financing in Eurodollars.
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