A 5 year bond issued by China Evergrande Company has coupon of 12% and Yield to Maturity of 17%. The issuing size is 1bln. It will mature in 3 years. 1. Assuming a bank funding cost to a investor is 4%. What is the total return for investor if it borrows from bank and buy the bond, holding the bond to maturity? 2. What is the fair price of the CDS on this bond if investor wants to buy CDS from Bank? 3. The bank can get 3 year funding with interest rate of 2%. What is the fair price for Bank to pay to buy CDS in the market? 4. If Bank buys CDS and sells to the investor, what is the profit margin of such trade if the notional is 10mm USD? 5. What would be the risk for this transaction? Can Bank do this trade with notional of 100mm to make more money? 1bln? 2bln? A 5 year bond issued by China Evergrande Company has coupon of 12% and Yield to Maturity of 17%. The issuing size is 1bln. It will mature in 3 years. 1. Assuming a bank funding cost to a investor is 4%. What is the total return for investor if it borrows from bank and buy the bond, holding the bond to maturity? 2. What is the fair price of the CDS on this bond if investor wants to buy CDS from Bank? 3. The bank can get 3 year funding with interest rate of 2%. What is the fair price for Bank to pay to buy CDS in the market? 4. If Bank buys CDS and sells to the investor, what is the profit margin of such trade if the notional is 10mm USD? 5. What would be the risk for this transaction? Can Bank do this trade with notional of 100mm to make more money? 1bln? 2bln