The following information relates to Question 17 Anna Lebedeva is a fixed-income portfolio manager. Paulina Kowalski, a junior analyst, and Lebedeva meet to review several positions in Lebedeva's portfolio. Lebedeva begins the meeting by discussing credit rating migration. Kowalski asks Lebedeva about the typical impact of credit rating migration on the expected return on a bond. Lebedeva asks Kowalski to estimate the expected return over the next year on a bond issued by Whim Corp. The BBB rated bond has a yield to maturity of 6.30% and a modified duration of 8.83. Kowalski calculates the expected return on the bond over the next year given the partial credit transition and credit spread data in Exhibit 1. She assumes that market spreads and yields will remain stable over the year. BBB B Whim Corp Bond Credit spread Probability (%) AAA 0.45% 1.00% AA 0.82% 2.20% 1.41% 5.10% 1.48% 81.00% BB 2.60% 7.70% 7.10% 1.85% CCC, CC, C 11.14% 1.15% Exhibit 1 One-Year Transition Matrix for BBB Rated Bonds and Credit Spreads 17. Based on Exhibit 1, the one-year expected return on the Entre Corp. bond is closest to: A. 3.41 % B. 4.24 % C. 3.89 % BP BL BM BN BO BP BQ BR Exhibit One-Year Transition Matrix for BBB Rated Bonds and Credit Spreads BL BM BN BO BQ BR Whim Corp Bond AAA 4 BBB BB B CCC, CC, C Credit spread 0.45% 0.82% 1.41% 1.48% 2.60% 7.10% 11.1496 Probability (%) 1.00% 2.20% 5.10% 81.00% 7.70% 1.85% 1.15% AA 10 13 Whim Corp Bond Yield To Maturity 6.30% Modified Duration 8.83 14 Answers Q# Possible Credit Transitions From BBB TO... 18 17 AAA 19 17 20 17 A 21 17 BB B 22 17 23 17 CCC, CC, C 25 17 Expected Percentage Price Change 27 17 Expected Return The following information relates to Question 17 Anna Lebedeva is a fixed-income portfolio manager. Paulina Kowalski, a junior analyst, and Lebedeva meet to review several positions in Lebedeva's portfolio. Lebedeva begins the meeting by discussing credit rating migration. Kowalski asks Lebedeva about the typical impact of credit rating migration on the expected return on a bond. Lebedeva asks Kowalski to estimate the expected return over the next year on a bond issued by Whim Corp. The BBB rated bond has a yield to maturity of 6.30% and a modified duration of 8.83. Kowalski calculates the expected return on the bond over the next year given the partial credit transition and credit spread data in Exhibit 1. She assumes that market spreads and yields will remain stable over the year. BBB B Whim Corp Bond Credit spread Probability (%) AAA 0.45% 1.00% AA 0.82% 2.20% 1.41% 5.10% 1.48% 81.00% BB 2.60% 7.70% 7.10% 1.85% CCC, CC, C 11.14% 1.15% Exhibit 1 One-Year Transition Matrix for BBB Rated Bonds and Credit Spreads 17. Based on Exhibit 1, the one-year expected return on the Entre Corp. bond is closest to: A. 3.41 % B. 4.24 % C. 3.89 % BP BL BM BN BO BP BQ BR Exhibit One-Year Transition Matrix for BBB Rated Bonds and Credit Spreads BL BM BN BO BQ BR Whim Corp Bond AAA 4 BBB BB B CCC, CC, C Credit spread 0.45% 0.82% 1.41% 1.48% 2.60% 7.10% 11.1496 Probability (%) 1.00% 2.20% 5.10% 81.00% 7.70% 1.85% 1.15% AA 10 13 Whim Corp Bond Yield To Maturity 6.30% Modified Duration 8.83 14 Answers Q# Possible Credit Transitions From BBB TO... 18 17 AAA 19 17 20 17 A 21 17 BB B 22 17 23 17 CCC, CC, C 25 17 Expected Percentage Price Change 27 17 Expected Return
