Question
Assume a three year corporate bond with a $1,000 par value is paying a 8.5% coupon semiannually and the YTM is 6%. The prime rate
Assume a three year corporate bond with a $1,000 par value is paying a 8.5% coupon semiannually and the YTM is 6%. The prime rate is 4% and the risk free rate is 1.5%. The bank is planning to charge $8.75 in fees, with a reserve requirement of 8% and a compensating balance of 14%. The bank has an ROE of 5.75% expects to lose $0.15 on the dollar in the event of default and is concerned with a 3% increase in yields.
I. What is the gross return on this bond?
II. What is the implied probability of default?
III. What is the Risk Adjusted Return on Capital (RAROC)?
IV. What is the Moody's KMV Risk and Return?
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