There is a 5-year corporate bond currently trading in the market that pays 5 percent coupon, with (for simplicity) coupon payments made once a year at the end of the year (with the next coupon paid exactly one year from now). The current price of this bond is $1020. a. What would be the price of this bond if the market considered this corporation to be free of default risk? Hint: what would the value of the bond be based on the yield curve on zeros given in Problem 2 above? CF 5 yr 51. FV = PV (1+r) FV = 1020(1+.05) 5 1301.807194 FV = PV (1+r) FV = 1020(1+.0400)5 = 1240.98596 1020 2 YTM Syrs 0400 3 10 b. At the price the corporate bond would be if it where default free (i.e., your answer to part a above), its effective annual yield to maturity should be.03895 (3.896 %). At its actual market value of $1020, is it's actual yield to maturity higher, lower, or equal to 3.896%. Circle one: higher than 3.896% lower than 3.896% equal to 3.986% Explain why here: 1020 1240.98596 1020 1 1100 1020 1153 hould be 03995 but is .0400 1177 FV = PV (ITK)N FV=1020(It.01523) 5 Should be lower TM=/face 1 because the YTM would increase due to the A in 1. pay C. Assume that at a price of $1020, the yield to maturity is 4.544% (by the way, I am not saying it is, I'm just telling you to ASSUME that it is). Based on a recovery rate of 80% (R = .8), what does the market think the probability of default is on this corporate bond? Probability of Default = b.475029 3 56. St 5- -3 J Problem 2. (10 points) Throughout the remainder of this exam, you should use the following information on the current (t = 0) yield curve. That is, unless stated otherwise, use the information below for calculating any values or yields needed in any of the subsequent Problems in this exam. Today (5/27/22), the prices on zero-coupon US Treasury STRIPS are as follows: Maturity In years Price (per $100 in face value) Effective Annual YTM 1 98.50 (106/98.5) - 1 .61523 1/2 95.20 (98.5/95.2) -1 -024900 91.75 (95-291-75) 13. .029116 .03501. 87.14 (9175/87.14) - 82.19 (87.14/82-19) 15-1 1.04000. Questi ~ 3 4 5 2 There is a 5-year corporate bond currently trading in the market that pays 5 percent coupon, with (for simplicity) coupon payments made once a year at the end of the year (with the next coupon paid exactly one year from now). The current price of this bond is $1020. a. What would be the price of this bond if the market considered this corporation to be free of default risk? Hint: what would the value of the bond be based on the yield curve on zeros given in Problem 2 above? CF 5 yr 51. FV = PV (1+r) FV = 1020(1+.05) 5 1301.807194 FV = PV (1+r) FV = 1020(1+.0400)5 = 1240.98596 1020 2 YTM Syrs 0400 3 10 b. At the price the corporate bond would be if it where default free (i.e., your answer to part a above), its effective annual yield to maturity should be.03895 (3.896 %). At its actual market value of $1020, is it's actual yield to maturity higher, lower, or equal to 3.896%. Circle one: higher than 3.896% lower than 3.896% equal to 3.986% Explain why here: 1020 1240.98596 1020 1 1100 1020 1153 hould be 03995 but is .0400 1177 FV = PV (ITK)N FV=1020(It.01523) 5 Should be lower TM=/face 1 because the YTM would increase due to the A in 1. pay C. Assume that at a price of $1020, the yield to maturity is 4.544% (by the way, I am not saying it is, I'm just telling you to ASSUME that it is). Based on a recovery rate of 80% (R = .8), what does the market think the probability of default is on this corporate bond? Probability of Default = b.475029 3 56. St 5- -3 J Problem 2. (10 points) Throughout the remainder of this exam, you should use the following information on the current (t = 0) yield curve. That is, unless stated otherwise, use the information below for calculating any values or yields needed in any of the subsequent Problems in this exam. Today (5/27/22), the prices on zero-coupon US Treasury STRIPS are as follows: Maturity In years Price (per $100 in face value) Effective Annual YTM 1 98.50 (106/98.5) - 1 .61523 1/2 95.20 (98.5/95.2) -1 -024900 91.75 (95-291-75) 13. .029116 .03501. 87.14 (9175/87.14) - 82.19 (87.14/82-19) 15-1 1.04000. Questi ~ 3 4 5 2
