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Assume you are bullish on a mortgage CDO which has many tranches of debt. Here are the tranches. You can buy a 7-year bond. The
Assume you are bullish on a mortgage CDO which has many tranches of debt. Here are the tranches.
You can buy a 7-year bond. The 6-year data is to help you with your analysis. You cant buy the B level, but you can buy the rest. In one years time, you believe that there is a 50% chance of no change in credit, a 35% chance of a 1 notch upgrade (A to AA for example), and a 15% chance of a 1-notch downgrade (AA to A for example).
Use the same probabilities for all bonds. What tranche would you want to buy? Support your argument with data/analysis.
Maturity 7 Years 6 Years B 1.20% 1.80% 2.20% 2.60% 5.00% 5.30% 1.10% 1.60% 2.00% 2.40% 4.60% 5.00% Maturity 7 Years 6 Years B 1.20% 1.80% 2.20% 2.60% 5.00% 5.30% 1.10% 1.60% 2.00% 2.40% 4.60% 5.00%Step by Step Solution
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