fm3_chapter28 - UN-new chapter 17 AFace value F100Price...

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Unformatted text preview: UN-new chapter 17, AFace value, F100Price, P90Annual coupon rate, Q8%Default probability20%Recovery percentage40%Expected period 1 cash flow94.4#MACRO?Expected return4.89%#MACRO?EXPECTED RETURN ON A ONE-YEAR BONDWITH AN ADJUSTMENT FOR DEFAULT PROBABILITYABC123456789UN-new chapter 17, BOne-period transition matrixABCDEA0.97000.02000.01000.00000.0000B0.05000.80000.15000.00000.0000C0.01000.02000.75000.22000.0000D0.00000.00000.00000.00001.0000E0.00000.00000.00000.00001.0000Two-period transition matrixABCDEA0.94200.03560.02020.00220.0000B0.09000.64400.23300.03300.0000C0.01820.03120.56560.16500.2200D0.00000.00000.00000.00001.0000E0.00000.00000.00000.00001.0000#MACRO?Three-period transition matrixABCDEA0.91570.04770.02990.00440.0022B0.12180.52170.27230.05130.0330C0.02490.03660.42910.12440.3850D0.00000.00000.00000.00001.0000E0.00000.00000.00000.00001.0000#MACRO?USING THE MMULT FUNCTIONTo compute multi-period transition matricesABCDEF1234567891011121314151617181920212223242526UN-new chapter 17, COne-period transition matrixABCDEA0.97000.02000.01000.00000.0000B0.05000.80000.15000.00000.0000C0.01000.02000.75000.22000.0000D0.00000.00000.00000.00001.0000E0.00000.00000.00000.00001.0000t10t-period transition matrixABCDEA#MACRO? #MACRO? #MACRO? #MACRO? #MACRO?B#MACRO? #MACRO? #MACRO? #MACRO? #MACRO?C#MACRO? #MACRO? #MACRO? #MACRO? #MACRO?D#MACRO? #MACRO? #MACRO? #MACRO? #MACRO?E#MACRO? #MACRO? #MACRO? #MACRO? #MACRO?#MACRO?USING THE FUNCTION MATRIXPOWERTo compute multi-period transition matricesABCDEF12345678910111213141516171819UN - new chapter 17, DPage 4CALCULATING THE EXPECTED BOND RETURNBond price100.00%Payoff (t<N)Payoff (N)Coupon rate, Q7%Cells to right7%Cells to right107%50%are called7%are called107%Bond term, N5 "payoff1"7%"payoff2"107%Initial ratingBin row 2050%in row 2050%0%0%ABCDETransition matrix →A0.97000.02000.01000.00000.0000B0.05000.80000.15000.00000.0000C0.01000.02000.75000.22000.0000D0.00000.00000.00000.00001.0000E0.00000.00000.00000.00001.0000Initial vector1#MACRO?Year12345678Expected payoffs-1.0000#######MACRO?#MACRO?###0.00000.00000.0000Expected yield######Data table: Recovery percentage and expected yield######0%###7%10%###7%20%###7%30%###7%40%###7%50%###7%60%###7%Recovery rate, λRecovery percentage, λ=IF(year>bondterm,0,IF(year=bondterm,MMULT(initial,MMULT(matrixpower(transition,year),payoff2)),MMULT(initial,MMULT(matrixpower(transition,year),payoff1))))IRR of expected payoffs6%7%8%Bond Expected Return and Recovery RateBond price = 100%, Bond Rating = B, Coupon = 7.00%ABCDEFGHIJ123456789101112131415161718192021222324252627282930313233343536UN - new chapter 17, DPage 570%###7%80%###7%90%###7%100%###7%Note: The data table has a series with thecoupon rate appended so that in the graph wecan see the convergence of the bond expectedreturn to the coupon rate (cells C30:C40)Graph title below (notice use of text functions):Bond Expected Return and Recovery RateBond price = 100%, Bond Rating = B, Coupon = 7.00%0%10%20%30%40%50%60%70%80%90%100%0%1%2%3%4%5%ABCDEFGHIJ3738394041424344454647UN - new chapter 17, D...
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fm3_chapter28 - UN-new chapter 17 AFace value F100Price...

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