A bank has invested in two bonds, bond A and bond B, which have the following future cashflows: The bank has access to the transition matrix and the forward zeros curves (Table 1 and Table 2 below). The bank has analysed past recovery rates and has concluded that the recovery rate for these bonds would be zero. Suppose the expected value of both bonds in one year is $106m. a) What is the one year 1% credit VaR for bond B? b) What is the one year 1% credit VaR for bond A ? c) Suppose the bank buys a credit spread forward on the full value of each bond. How will this change the one-year credit VaR calculated above? Table 1. Transition Matrix Table 2. Forward Zeros A bank has invested in two bonds, bond A and bond B, which have the following future cashflows: The bank has access to the transition matrix and the forward zeros curves (Table 1 and Table 2 below). The bank has analysed past recovery rates and has concluded that the recovery rate for these bonds would be zero. Suppose the expected value of both bonds in one year is $106m. a) What is the one year 1% credit VaR for bond B? b) What is the one year 1% credit VaR for bond A ? c) Suppose the bank buys a credit spread forward on the full value of each bond. How will this change the one-year credit VaR calculated above? Table 1. Transition Matrix Table 2. Forward Zeros