Chapter 23

# Chapter 23 - UN-new chapter 17 AEXPECTED RETURN ON A...

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Unformatted text preview: UN-new chapter 17, AEXPECTED RETURN ON A ONE-YEAR BONDWITH AN ADJUSTMENT FOR DEFAULT PROBABILITYFace value, F100Price, P98Annual coupon rate, Q16%90%80%Expected cash flow112.4 <-- =B7*(1+B6)*B4+(1-B7)*B8*B4Expected return14.69% <-- =B10/B5-1Nondefault probability, πRecovery percentage, λABCDEF1234567891011UN-new chapter 17, BUSING THE MMULT FUNCTIONOne-period transition matrix0.99000.01000.00000.00000.03000.96000.01000.00000.00000.00000.00001.00000.00000.00000.00001.0000Two-period transition matrix0.98040.01950.00010.00000.05850.92190.00960.01000.00000.00000.00001.00000.00000.00000.00001.0000Three-period transition matrix0.97120.02850.00020.00010.08560.88560.00920.01960.00000.00000.00001.00000.00000.00000.00001.0000Cells A11:D14 contain array formula{=MMULT(A4:D7,A4:D7)}Cells A20:D23 contain array formula{=MMULT(A4:D7,A11:D14)}ABCD1234567891011121314151617181920212223242526UN-new chapter 17, CUSING THE FUNCTION MATRIXPOWEROne-period transition matrix0.99000.01000.00000.0000can be viewed by pressing [Alt]+F110.03000.96000.01000.0000and going to the VBA module.0.00000.00000.00001.00000.00000.00000.00001.0000t10t-period transition matrix################################################The matrixpowerVBA functionCells A12:D15 contain array formula{=MATRIXPOWER(A4:D7,B9)}ABCDEFGHI1234567891011121314151617181920UN - new chapter 17, DPage 4CALCULATING THE EXPECTED BOND RETURNBond price98.00%Payof (t<N)Payof (N)Coupon rate, Q7%Cel s F4:F77%Cel s I4:I7107%80%are cal ed7%are cal ed107%Bond term, N5 "payof 1"80%"payof 2"80%Initial ratingBin row 19in row 19ABDETransition matrixA0.99900.00100.00000.0000B0.03000.96000.01000.0000D0.00000.00000.00001.0000E0.00000.00000.00001.0000Initial vector1Year12345678910111213141516171819202122232425262728293031323334353637383940Expected payof s-0.9800#######MACRO?#MACRO?###0.00000.00000.00000.00000.00000.00000....
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Chapter 23 - UN-new chapter 17 AEXPECTED RETURN ON A...

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