Explain the logic behind the design of the product

Reference no: EM132270270

Question: 1. Describe the situation of LDC Debt in 1988. Consider what is similar to and what is different from recent issues in sovereign debt markets.

2. What product had J.P. Morgan developed? Describe the features of the bank debt bond swap and explain the logic behind the design of the product.

3. Describe the principal collateral and other protective covenants.

4. How did the bid system for the product work?

5. Describe the U.S. Treasury and swap rates stated in the case.

6. Value the product. What is the swap ratio of bank debt to bonds implied by the bond's characteristics and the U.S. treasury and swap rates you described?

(a) First, compute the value of the 20-year Treasury strip collateral. Note that coupon payments are made semi-annually.

(b) Assuming no default, compute the value of the semi-annual coupon payments of LIBOR + 1.625% for 20 years.

i. Hint: Use the swap quotes in the case to forecast future LIBOR.

ii. Hint: If the approximate duration of the coupon annuity is 14 years, one can use the yield on a 14-year Treasury to discount the coupons.

(c) Assuming that the market expects to receive only 50% of the no default value of the coupon annuity, what is the market value of the coupon annuity?

(d) What is the ratio of bank debt to bonds if the market currently values the bank debt at 50% of its promised value?

Information related to above question is enclosed below:

Attachment:- EF4331_casestudy3.rar

Reference no: EM132270270

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