Question 11 You are an investment grade manager and can only buy investment grade bonds. You are to take a 1-year horizon look and invest in a bond based upon the best expected return. You are uncertain about the future. Your base case (50%) is that nothing changes in the credit ratings world. You apply a 25% chance for an upgrade and a 25% chance for a downgrade. Assume ratings will only move 1 notch in either direction (AA to A is one notch, as is BBB to A). What bond would you prefer? (You cannot buy the B tranche.) Maturity 9 years AAA AA BBB BB B 10 years Par 2.00% 2.15% 2.30% 3.00% 6.00% 9.00% 1.90% 2.05% 2.15% 2.80% 5.70% 8.70% I have put the numbers and some calculations into the spreadsheet. You can use this to fill out your calculations. Question 11 You are an investment grade manager and can only buy investment grade bonds. You are to take a 1-year horizon look and invest in a bond based upon the best expected return. You are uncertain about the future. Your base case (50%) is that nothing changes in the credit ratings world. You apply a 25% chance for an upgrade and a 25% chance for a downgrade. Assume ratings will only move 1 notch in either direction (AA to A is one notch, as is BBB to A). What bond would you prefer? (You cannot buy the B tranche.) Maturity 9 years AAA AA BBB BB B 10 years Par 2.00% 2.15% 2.30% 3.00% 6.00% 9.00% 1.90% 2.05% 2.15% 2.80% 5.70% 8.70% I have put the numbers and some calculations into the spreadsheet. You can use this to fill out your calculations