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6. Consider a set of medium-quality bonds, rated according to Standard and Poor's (S&Ps) bond rating scheme, where in terms of risk: A > Aa
6. Consider a set of medium-quality bonds, rated according to Standard and Poor's (S&Ps) bond rating scheme, where in terms of risk: A > Aa > Aaa If Z is a bond rating and W is the bond yield (%), suppose the probability mass function of Z and W is: Pzw(2,W) Z 1 (A) 2 (Aa) 3 (Aaa) W 4.25 0.13 0.05 0.00 5.75 0.02 0.14 0.02 8.75 0.00 0.01 0.13 a) Find E(Z) and E(W) b) Are the bond rating Z and yield W independent? Use expectation. c) Find E(WIZ-1) 6. Consider a set of medium-quality bonds, rated according to Standard and Poor's (S&Ps) bond rating scheme, where in terms of risk: A > Aa > Aaa If Z is a bond rating and W is the bond yield (%), suppose the probability mass function of Z and W is: Pzw(2,W) Z 1 (A) 2 (Aa) 3 (Aaa) W 4.25 0.13 0.05 0.00 5.75 0.02 0.14 0.02 8.75 0.00 0.01 0.13 a) Find E(Z) and E(W) b) Are the bond rating Z and yield W independent? Use expectation. c) Find E(WIZ-1)
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