Solution 8

Solution 8 - be x . With x , two bonds default together and...

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Fin 448: Fixed-Income Securities Homework Solution 8 Wei Yang Each problem counts as 10 points. 1 Default correlation and CDO (1.1) π * Total payoff Senior 2% 100 100 6% 150 140 92% 200 140 Price 139.2 Yield 57.47 (1.2) The value of the senior tranche decrease with correlation. We need a lower joint default probability than 2% to achieve a smaller spread. Let the probability
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Unformatted text preview: be x . With x , two bonds default together and the senior tranche is paid 100. If only one bond defaults or neither defaults, the senior tranche gets 140. To achieve a target spread of 40 bp, the price must be such that 140 P-1 = 0 . 0040 P = 140 1 . 0040 100 x + 140(1-x ) = P x = 1 . 39% 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.

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