Exercise 1 (Bond Valuation & Risk Management) An investment bank intends to issue a fixed-rate coupon bond which has the following conditions: maturity: 3 years coupon: 8 % p.a. (paid annually at the end of the period ) repayment: 100% of notional (after 3 years) ALM-Treasury of the investment bank provides the following interest rate information (zerobond yields in % p.a.). maturity (years) 1 2 3 4 zerobond yield (in % p.a.) 3,00% 4,00% 5,00% 6,00% a) Please create the cash-flow of this bond. b) Please calculate the arbitrage-free issue price [] of this riskless bond. The investment bank intends to issue a new risky fixed-rate coupon bond, which has the same cash flow as the riskless bond, a LGD of 10% and a PD of 5%. c) Please calculate the Expected Loss for the new risky bond d) Please calculate the risk premium () e) Please briefly explain what a risk premium is Exercise 1 (Bond Valuation & Risk Management) An investment bank intends to issue a fixed-rate coupon bond which has the following conditions: maturity: 3 years coupon: 8 % p.a. (paid annually at the end of the period ) repayment: 100% of notional (after 3 years) ALM-Treasury of the investment bank provides the following interest rate information (zerobond yields in % p.a.). maturity (years) 1 2 3 4 zerobond yield (in % p.a.) 3,00% 4,00% 5,00% 6,00% a) Please create the cash-flow of this bond. b) Please calculate the arbitrage-free issue price [] of this riskless bond. The investment bank intends to issue a new risky fixed-rate coupon bond, which has the same cash flow as the riskless bond, a LGD of 10% and a PD of 5%. c) Please calculate the Expected Loss for the new risky bond d) Please calculate the risk premium () e) Please briefly explain what a risk premium is