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The answer in red: Please explain how we got exposure and how we got the value of risk-free bond? Please explain with formula 9. Consider
The answer in red: Please explain how we got exposure and how we got the value of risk-free bond?
Please explain with formula
9. Consider a 2.00% annual-coupon bond with 3 years to maturity. The estimated recovery rate is 20% and the risk-neutral default probability is 2%, assuming conditional probabilities of default. Assume a flat yield curve at 3.00%, and that default occurs only at year end - on dates 1,2, and 3 - and that default will not occur on date 0 , the current date. Exposure, recovery, and loss given default values are expressed per 1,000 of par value. a. Calculate the credit valuation adjustment (CVA) using the table below. b. Calculate the value of the risky bond based on your CVA, and its yield spread. Practice questions for 3170 final - A b. Calculate the value of the risky bond based on your CVA, and its yield spread. Answer below: The value of the risk-free bond: 971.7139 The value of the risky bond is therefore 971.713944.8231=926.8908 Entering these values in your calculator results in YTM =4.668% for a yield spread of 166.8bpsStep by Step Solution
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