Reference no: EM132956582

1. A zero-coupon bond with an 8-year maturity and a face value of $1000 has a market value of $800. What is the bond's YTM? Enter answer as a percentage number but without the "%" sign (Example: Enter 10.50 for 10.50%; Do not enter "10.50%" or "0.1050").
2. A bond has a face value of $1000 with a maturity of 8 years. Its annual coupon payment is 5% of its face value. The YTM for bond is 3%. What is the market value of the bond? Enter your answer as dollar amount without the dollar sign "tiny_mce_markerquot; and keep two decimals (Example: Enter 549.49 for $549.49; do not enter "$549.49").
3. A bond has a face value of $1000 with a maturity of 8 years. Its annual coupon payment is 5% of its face value. The YTM for bond is 3%. What is the modified duration of this bond? Enter your answer as a number without any units; keep two decimals.
4. Suppose the face value of a firm's zero-coupon debt is $6 billion with a maturity of 2 years and YTM at 10%. The equivalent risk-free rate is 5%. Based on the Black-Scholes/Merton model, what is the value of a put on the firm's assets with a strike at the face value of its debt ($6 billion)? Enter your answer as billion dollar amount without the dollar sign "tiny_mce_markerquot; and keep two decimals (Example: Enter 0.89 for $0.89 billion; do not enter "$0.89 billion" or "0.89 billion" or "$0.89").
5. Suppose that the market expects that there is a 20 percent chance a borrower will default and the recovery is expected to be 40 percent. Assume the premium for the CDS on the borrower's debt is the same as the expected loss. How much is the CDS seller's net loss (in percentage) in case of an actual default and the realized recovery is the same as expected (ignoring the time value of money)? Enter answer as a percentage number but without the "%" sign (Example: Enter 10.50 for 10.50%; do not enter "10.50%" or "0.1050").
6. If the cumulative probability of default of a bond for the next five years (ten 6-month periods) is 0.4141 (41.41%), what is probability of default per 6-month period? Enter answer as a percentage number but without the "%" sign (Example: Enter 10.50 for 10.50%; do not enter "10.50%" or "0.1050").
7. If the cumulative probability of default of a bond for the next five years (ten 6-month periods) is 0.4141 (41.41%), what is the conditional marginal probability of default in the third 6-month period? Enter answer as a percentage number but without the "%" sign (Example: Enter 10.50 for 10.50%; do not enter "10.50%" or "0.1050").
8. A risky bond has a maturity of two years with a coupon rate of 10% to be paid annually and a face value of $1000. The YTM of the bond is 6%. What is the equivalent zero-coupon face value if this zero-coupon bond has the same modified duration and YTM as the coupon paying bond? Enter your answer as dollar amount without the dollar sign "tiny_mce_markerquot; and keep two decimals (Example: Enter 549.49 for $549.49; do not enter "$549.49").

9. According to the Merton model for valuing corporate debt and our discussion of the credit default swap case, the bondholder in a firm (assuming all other conditions are satisfied)
a. owns a risk-free zero-coupon bond and is short a put option with a strike price equal to the
face value of the firm's risky coupon bond.
b. owns a risk-free zero-coupon bond and is short a put option with a strike price equal to the
face value of the firm's risky zero-coupon bond.
c. owns a risk-free coupon bond and is short a put option with a strike price equal to the face
value of the firm's risky coupon bond.
d. owns a risk-free coupon bond and is short a put option with a strike price equal to the face
value of the firm's risky zero-coupon bond.
10. Which of the following is NOT true about securities lending business, according to our analysis of AIG?
a. In a securities lending transaction, one party borrows a security from another and deposits collateral, typically cash, with the securities lender.
b. The securities lender has relatively lower risk than the securities borrower as the lender can always demand back the lent securities.
c. The securities lender invests the collateral and earns a yield from these investments, less a rebate paid to the securities borrower.
d. The cost to the security borrower is the difference between the return the borrower could have earned investing the cash collateral and the security borrowing fee.