[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 %
|
….
|
….
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[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
|
|
|
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Interest
|
Credit
|
Credit
|
|
|
|
|
|
coverage
|
Rating
|
Spread
|
|
|
|
|
|
ratio
|
|
over risk-free rate
|
|
|
|
|
|
|
|
|
|
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|
|
|
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%
|
|
|
|
|
|
|
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|
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| |
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[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