Jeffrey Cherkin
Fixed Income Homework 14
Chapter 9: questions 8, 13
Question 8
The step up and step down structure is used to either increase or decrease a bonds coupon
payments based on the issuers credit rating. If an issuer is downgraded, the step up w
Jeffrey Cherkin
Fixed Income Homework 3
Question 1
Yield = 11.985%
Trial 1
Yield
Years
from
now
Trial 2
10%
CF to
investor
Yield
PV of CF
Years
from
now
Trial 3
12%
CF to
investor
Yield
PV of CF
Years
from
now
11.987%
CF to
investor
PV of CF
1
2,000
1,818
Jeffrey Cherkin
Fixed Income Homework 2
Question 6
The interest rate is important because it represents the required return on investment to reach the
pension obligation or the discount rate. The present value of the bond increases as the discount
rate de
Jeffrey Cherkin
Fixed Income Homework 15
Chapter 15: questions 5, 13
Question 5
What is meant by cash flow waterfall?
It is the prioritization of payment to bondholders and how the underlying collateral is used to pay
secure bondholders and in what order.
Jeffrey Cherkin
Fixed Income Homework 8
Chapter 5: questions 13,14
Question 13
Part A: Answers highlighted in green is excel below.
Part B: Bond price is equal to present value of cash flows which is equal to 90.38
(1+)^13
(1.043)^13
Part C: f12 = (1+)^12
Jeffrey Cherkin
Fixed Income Homework 7
Chapter 5: questions 3 & 6
Question 3
Why is the option-adjusted spread more suitable for a bond with an embedded option than a
yield spread?
The bond with an option is composed as both a bond and an option. The bui
Jeffrey Cherkin
Fixed Income Homework 13
Chapter 9: question 11
Question 11
A. The different ratings are due to the currency risk. This has resulted in more frequent
defaults in debt denominated in foreign currencies. A country is more able to meet the
re
Jeffrey Cherkin
Fixed Income Homework 22
Chapter 20: Question 7
Question 7
Discuss this strategy for investing in convertible bonds.
The strategy offers potential upside due to the future appreciation of the underlying companys
equity. As a result, these
Jeffrey Cherkin
Fixed Income Homework 11
Chapter 7: questions 28
Question 28
What is a rating transition matrix?
It is a set of data showing how ratings change over various periods of time. It shows the number
of upgrades and downgrades for a given period
Jeffrey Cherkin
Fixed Income Homework 9
Chapter 6: questions 5,8
Question 5
Price = 980,000; Face value = $1 million; 90 days to maturity
Yd = (20,000 / 1 million) * (360/90)
Yd = 8%
Question 8
Noncompetitive bidder is a bidder who is willing to purchase
Jeffrey Cherkin
Fixed Income Homework 12
Chapter 7: questions 27, 2, 3
Question 2
A. Liquidation is when the company dissolves and sells off their remaining assets to help
repay debts. Reorganization is when the company changes their current business and
Jeffrey Cherkin
Fixed Income Homework 17
Chapter 17: questions 7, 8, 13
Question 7
What is an arbitrage free interest-rate model?
It interpolates the term structure of interest rates from a set of securities market prices.
The model compares the market pr
Jeffrey Cherkin
Fixed Income Homework 18
Chapter 18: questions 2, 5, 6
Question 2
Spread is 50 bps
Excel screenshot:
Question 5
What is negative convexity?
Negative convexity is when the bond yield curve is concave. When the change in price a bond
when it
1.
PV=2000/(1+y)+2000/(1+y)2+2500/(1+y)3+4000/(1+y)4=7704
With financial calculator, we know y=11.987%
2.
Effective annual yield=(1+semiannual interest rate) 2-1=(1+4.3%)2-1=8.785%
5.a.
Bond W: (0.07*1000/2=)$35 is paid semiannually for 5 years(10 periods
2a. Price value of a basis point
Bond A: C = $4
y = 0.0801 / 2 = 0.04005
n = 2*2 = 4
P =C(1-(1+r)-n)/n+M/(1+r)n=4*(1-1.04005^-4)/0.04005+100/1.04005^4
=14.5179+85.464=$99.982
The price value of a basis point is about $100 $99.982 = $0.018 per $100.
Bond B
Jeffrey Cherkin
Fixed Income Homework 21
Chapter 20: Questions 1, 3
Question 1
In the October 26, 1992, prospectus summary of the Staples 5% convertible subordinated
debentures due 1999, the offering stated: Convertible into Common Stock at a conversion p
Jeffrey Cherkin
Fixed Income Homework 10
Chapter 6: questions 11, 2
Question 11
Part A:
February 15 to April 8 > Days: Feb 14, March 31, April 7
Days accrued interest: 52 days
Part B:
Coupon rate: 7% > Semiannual: 3.50
Days per coupon = 182
Percent of cou
Jeffrey Cherkin
Fixed Income Homework 20
Chapter 18: question 17
Question 17
What is the effect of greater expected interest-rate volatility on the option-adjusted spread of a
security?
The higher the expected interest rate volatility, the lower the optio
Jeffrey Cherkin
Fixed Income Homework 15
Chapter 15: question 2
Question 2
In achieving the benefits associated with a securitization, why is the special purpose vehicle
important to the transaction?
The purpose of the SPV is to organize collateral for a