HW2 - Columbia University M.S in Financial Engineering IEOR...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Columbia University M.S. in Financial Engineering IEOR 4731: Credit Derivatives Instructor: Rama CONT Assignment 2: Credit default swaps Assigments should be done individually. The table below displays the CDS term structure for FIAT on July 1, 2004. Maturity (yr) FIAT CDS premium (bps) Treasury yield 1 230 400 3 345 420 5 390 450 7 400 480 10 413 500 Yields are continuously compounded. We shall assume that ± the recovery rate is independent from the default time ± the CDS premium payments are made annually. 1. Using a linear interpolation of the CDS and yield curves and assuming an expected recovery rate R = 40%, construct the term structure of risk-neutral default probabilities F ( T ) for FIAT at maturities T = 1 ; 2 ; 3 ;:: 10 years. 2. Consider a FIAT bond with maturity 5 years, issued on July 1, 2004 for nominal 10 M$, paying an annual coupon of 8%. Assuming that in case of default the recovery is paid at the ±rst coupon date after default, compute the value of the bond. 3. Repeat questions 1 and 2 assuming an expected recovery rate
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

HW2 - Columbia University M.S in Financial Engineering IEOR...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online