To value the hypothetical credit instrument "Security A$"$ as of $2023-06-30,$ we'll need to calculate the dirty price, clean price $($if applicable$),$ dirty price percentage of par, clean price percentage of par $($if applicable$),$ and the yield to maturity $($YTM$)($if applicable$).$

Explanation:

Given Inputs:

Origination Date: $2020-01-01$

Maturity Date: $2025-12-31$

Principal Outstanding: EUR $1,000,000$

Interest Details:

$5\%$ PIK $($accrued$)$ interest rate paid annually at the end of the year

$4\%$ cash interest rate paid quarterly at the end of each quarter

Principal Amortization: $2\%$ principal amortization per year due end of the year

Credit Risk Adjustment: $+225$bps

Step $2$

Calculate the accrued PIK interest:

Accrued PIK interest $=$ Principal Outstanding $*$ PIK interest rate $=$ EUR $1,000,000*5\%=$ EUR $50,000$

Calculate the accrued cash interest:

For each quarter:

Cash Interest per quarter $=$ Principal Outstanding $*$ Cash interest rate per quarter $=$ EUR $1,000,000*4\%=$ EUR $40,000$

Accrued cash interest as of $2023-06-30=2$ quarters $*$ Cash Interest per quarter $=2*$ EUR $40,000=$ EUR $80,000$

Calculate the principal amortization for $2023$:

Principal Amortization for $2023=$ Principal Outstanding $*$ Principal amortization rate $=$ EUR $1,000,000*2\%=$ EUR $20,000$

Calculate the dirty price as of $2023-06-30$:

Dirty Price $=$ Principal Outstanding $+$ Accrued PIK Interest $+$ Accrued Cash Interest $-$ Principal Amortization for $2023$

Dirty Price $=$ EUR $1,000,000+$ EUR $50,000+$ EUR $80,000-$ EUR $20,000=$ EUR $1,110,000$

Explanation:

To calculate the dirty price, we need to consider the principal, accrued PIK interest, and accrued cash interest. The dirty price is the price of a bond including any interest that has accrued but not yet been paid.

My questions

Q$1.$ while computing Dirty price why we have taking principle outstanding $=$ EUR $1,000,000$

Q$2.$ What about the warrents given in question what adjustment we have to do regarding warrents