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fm3_problems28

# fm3_problems28 - UN-new chapter 17 A A B C D E F G H I J K...

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UN-new chapter 17, A Face value, F 100 Data table: expected return as function of Recovery % and Price Price, P 100 Annual coupon rate, Q 15% Recovery percentage 65% 37.19% 40% 50% 60% 70% 80% 90% 100% 65% 80 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% Price of bond --> 85 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% Expected cash flow 109.75 #MACRO? 90 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% Expected return 37.19% #MACRO? 100 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% 105 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% 37.19% EXPECTED RETURN ON A ONE-YEAR BONDWITH AN ADJUSTMENT FOR DEFAULT PROBABILITY Non-default probability, π Recovery percentage, λ A B C D E F G H I J K L M 1 2 3 4 5 6 7 8 9 10

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UN - new chapter 17, D Page 2 CALCULATING THE EXPECTED BOND RETURN Bond price 100.00% Payoff(t<N) Payoff(N) Coupon rate, Q 9.3637% 9.36% 109.36% 50% 9.36% 109.36% Bond term, N 10 9.36% 109.36% Initial rating C 50.00% 50.00% 0.00% 0.00% A B C D E Transition matrix A 1.0000 0.0000 0.0000 0.0000 0.0000 B 0.0600 0.9000 0.0300 0.0100 0.0000 C 0.0200 0.0500 0.8800 0.0500 0.0000 D 0.0000 0.0000 0.0000 0.0000 1.0000 E 0.0000 0.0000 0.0000 0.0000 1.0000 Initial vector 0 0 1 0 0 Year 0 1 2 3 4 5 6 7 8 Expected payoffs -1.0000 ### ### #MACRO? #MACRO? ### #MACRO? ### ### Expected yield #MACRO? ### #MACRO? A ten-year "B" bond will have to have a coupon rate of 7.6273% in order to have an expected return of 7%. A ten-year "C" bond will have to have a coupon rate of 9.3637% in order to have an expected return of 7%.
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