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A portfolio manager buys $1 million face amount of XYZ 8% bonds the day after they pay their coupon at 95 and simultaneously enters into
A portfolio manager buys $1 million face amount of XYZ 8% bonds the day after they pay their coupon at 95 and simultaneously enters into a 1 year, $1 million CDS (buying protection) @ a spread of 800 bps. On the last day of the year XYZ files for bankruptcy and does not pay its coupon. The bonds immediately trade to 30 upon the bankruptcy filing.
How much would the portfolio manager make or lose on this trade?
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