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Fixed Income - Credit Default Swap
Consider two zero coupon bonds with identical cash flows, maturity in one year, but different rating. Their prices are 99 and 102.57 respectively.
i) Price a CDS contract whose seller has the highest rating. Give an arbitrage strategy if the CDS price is smaller or bigger than the proposed value.
ii) Deal with bond prices only in order to estimate the risk neutral probability of default before one year.
iii) Compute the probability above by dealing with the CDS price. Check that both probabilities are identical. Why?
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.82 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. If the required return is 12 ..
Pullman Corp issued 10-year bonds four years ago with a coupon rate of 10.07 percent. At the time of issue, the bonds sold at par. Today bonds of similar risk and maturity must pay an annual coupon of 6.39 percent to sell at par value. Assuming semi ..
Suppose that B2B Inc. has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. If the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11 percent, and 9.5 percent, respectively, w..
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 35-year mortgage loan for 85 percent of the $2,500,000 purchase price. The monthly payment on this loan will be $16,600. what is effective annual rate?
Accounts Receivable (AR) receives an average of 1003 payments per week. Assume that the checks coming in are either small or large. Small checks are for an average of $477 and large checks are for an average of $5091. 20% of the checks coming in are ..
An investment will pay $200 at the end of each of the next 3 years, $300 at the end of Year 4, $600 at the end of Year 5, what is its present value?
what is the bond’s approximate modified duration? What is the Macaulay duration of the bond?
The risk free rate of interest is 2%. Which of the following statements is most accurate?
what is the expected change in the value per share due to the recapitalization?
Assume that the risk-free rate is 4.5% and that the market risk premium is 3%. What is the required rate of return on a stock with a beta of 1.2? What is the required rate of return on a stock with a beta of 1.1? What is the required return on the ma..
You are the manager of your own construction company and want to replace an old tractor you had bought seven years ago for $1,200,000. The asset has a useful life of 10 years and has been depreciating on a straight line basis. You purchase a new trac..
Ellen’s tax client is employed at a large company that offers medical flexible spending accounts to its employees.
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