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Unformatted text preview: two bonds defaulting together. We want to construct a senior tranche with a face value of 140, and a target spread of 40 bp. For simplicity, assume the risk-free rate is 0, and thus the eﬀective yield is also the spread. (1.1) If we choose two bonds with a 2% probability to default together, what is the resulting spread of the senior tranche? (1.2) In order to achieve the target spread of 40 bp for the senior tranche, how large is the probability for two bonds to default together? 1...
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This note was uploaded on 10/06/2011 for the course FIN 448 taught by Professor Weiyang during the Spring '10 term at Rochester.
- Spring '10