One of the industries most affected by oil prices is the airline industry. After labor costs, the price of jet fuel is typically the most important cost component for airline companies. In spite of this fact, hedging practices vary significantly within the industry. For example, Southeast Airlines (LOV) has more than half of its total jet fuel exposure hedged at the equivalent of $30$40 per barrel of oil, whereas United States Airlines (USA) does not hedge any of its jet fuel exposure. Currently, the market value of United States Airlines' assets is $26 billion, and it has promised to pay its bondholders $20 billion one year from now. Southeast Airlines holds assets worth $7 billion, and it has promised to pay its bondholders $3.5 billion one year from now. The riskless rate of interest is 5% per year, the standard deviation of the return on USA's assets is 50% per year, and the standard deviation of the return on LOV's assets is 30% per year. A. (6 points) What is the total market value of USA debt? What is the yield to maturity for USA debt? B. (6 points) What is the total market value of LOV debt? What is the yield to maturity for LOV debt? Now suppose that the federal government initiates a loan guarantee program that requires taxpayers to fully guarantee USA and LOV bonds against the risk of default. C. (6 points) What is the dollar value of the federal government's loan guarantee to USA bondholders? What effect does the initiation of the federal government's loan guarantee to USA have upon the yield to maturity for USA debt? D. (6 points) What is the dollar value of the federal government's loan guarantee to LOV bondholders? What effect does the initiation of the federal government's loan guarantee to LOV have upon the yield to maturity for LOV debr? One of the industries most affected by oil prices is the airline industry. After labor costs, the price of jet fuel is typically the most important cost component for airline companies. In spite of this fact, hedging practices vary significantly within the industry. For example, Southeast Airlines (LOV) has more than half of its total jet fuel exposure hedged at the equivalent of $30$40 per barrel of oil, whereas United States Airlines (USA) does not hedge any of its jet fuel exposure. Currently, the market value of United States Airlines' assets is $26 billion, and it has promised to pay its bondholders $20 billion one year from now. Southeast Airlines holds assets worth $7 billion, and it has promised to pay its bondholders $3.5 billion one year from now. The riskless rate of interest is 5% per year, the standard deviation of the return on USA's assets is 50% per year, and the standard deviation of the return on LOV's assets is 30% per year. A. (6 points) What is the total market value of USA debt? What is the yield to maturity for USA debt? B. (6 points) What is the total market value of LOV debt? What is the yield to maturity for LOV debt? Now suppose that the federal government initiates a loan guarantee program that requires taxpayers to fully guarantee USA and LOV bonds against the risk of default. C. (6 points) What is the dollar value of the federal government's loan guarantee to USA bondholders? What effect does the initiation of the federal government's loan guarantee to USA have upon the yield to maturity for USA debt? D. (6 points) What is the dollar value of the federal government's loan guarantee to LOV bondholders? What effect does the initiation of the federal government's loan guarantee to LOV have upon the yield to maturity for LOV debr
