A 5.25% ten-year semi-annual coupon bond newly issued by Qantas Airline (an Australian listed company) for $98.936. The bond has a face value of $100. She planned to hold the bond investment for one year. and,

A credit default swap contract (CDS) on her Qantas bond. She believed the CDS could minimize her interest rate risk on the bond investment. The yearly CDS premium is to be paid one year after CDS buyers' purchase date. The table below shows Qantas' CDS trading information for the CDS purchase date. The CDS bid and ask prices are a percentage of the bond's face value of $100, expressed in bps (100 bps = 1%). 

 

Required:

What is the total realised return on Jennie's investments for this one-year period after considering investments in bond and CDS? Assume that the reinvestment return on the coupon is 2% p.a. compounded semi-annually.

Comment on Jennie's CDS strategy.

If the bonds were callable and the market expects the Reserve Bank of Australia to raise interest rates soon, should Qantas' bondholders be concerned that the bonds will be redeemed early (i.e., before the bond's maturity date)? Answer and explain briefly.

Date One year ago CDS bid price 165 bps CDS ask price 185 bps Today, Jennie sold the bond immediately after receiving the second coupon payment on the bond, which were quoted with a YTM of 6.2% at the time of the sale; and, paid the CDS premium on the same day.