KIC000004 - • • Valuation of Defaultable Bonds -...

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Unformatted text preview: • • Valuation of Defaultable Bonds - continued Therefore, the PV oj the e~p..aed ""sh flo......discounted at tl1e fair Im",,,,l "'Ie r is: (l_ d (-ld (~ + _ C ~ + , ..+__ C _ + _ R _ J + (I+ r) (IH );' (l+ r/- 1 (l+r)T (l_d/(_C _+~+ + _ C_ _ + C + P J (l+r) (l+r)l-," ( l+ r l- 1 (l+r{ Valuation of Defaultable Bonds - continued After lots of algebra, we can sfm plify the previous expression to: p = (1- d)C + dR [1- (~)T] + F(~)T r wd l+r l+r When d=O, we are dealing with a Treasury. We know that r '" y In thai case and we are back to our other formula: 5 Bond Valuation- example 50 1 t 1 1,050 u..mple: two bond, with the ,arne promised <:ad,flows, one US Tn!a,ury and 0"'" ' ' ' porale, 2 ~i1rs to m ~turlty hee (Par) value = $1,000 10% ilnnua' coupon rate semi-annual coupon paV"'ents _ US Teea,urv bond with dl.wunl rate = 3% P'" semerter. 2 _ Corporate bond with default probability ,,11% per ,eme!;!;er, "'toyeryv~lue R",400 and iI discount l"iIte ~ 3.5% per semener, p =~+~+~+ 1,050=107434...
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This note was uploaded on 09/06/2011 for the course FIN 428 taught by Professor Hood during the Fall '11 term at Iowa State.

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KIC000004 - • • Valuation of Defaultable Bonds -...

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