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Asset Pricing Prediction with Forward Rates S&P's 1-year Transition Matrix Consider a 6-year annual bond with coupon rate 5.5% and par value $1,000. The current
Asset Pricing Prediction with Forward Rates S&P's 1-year Transition Matrix Consider a 6-year annual bond with coupon rate 5.5% and par value $1,000. The current credit rating of this bond is BB. Assume if the bond defaults, the bondholder will receive 52% of the face value of the bond. Calculate the current market value of the BB bond based on the spot rates given in Table 5. Calculate the 1-year forward rates for each credit rating category. Based on the credit rating transition matrix given in Table 4, construct the probability distribution of the market value of the bond due to change in credit quality over the next year. Estimate the expected value of the bond one year from today? What's the change in market value of the bond due to the change in credit quality? What is the capital gains yield over the next year? Asset Pricing Prediction with Forward Rates S&P's 1-year Transition Matrix Consider a 6-year annual bond with coupon rate 5.5% and par value $1,000. The current credit rating of this bond is BB. Assume if the bond defaults, the bondholder will receive 52% of the face value of the bond. Calculate the current market value of the BB bond based on the spot rates given in Table 5. Calculate the 1-year forward rates for each credit rating category. Based on the credit rating transition matrix given in Table 4, construct the probability distribution of the market value of the bond due to change in credit quality over the next year. Estimate the expected value of the bond one year from today? What's the change in market value of the bond due to the change in credit quality? What is the capital gains yield over the next year
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