2010 FIXED INCOME FINAL EXAM

2010 FIXED INCOME FINAL EXAM

Today is March 30th _{2010. On an excel sheet you will do the following :}

Sheet 1 (name your sheet PRICE):

 price a 5 year semi annual 5% coupon paying corporate bond yielding 4%. (use exp for present value)

 Calculate the sensitivity of the bond and show that convexity is 19.80

Sheet 2 (name your sheet Pdef)

 A similar coupon risk free bond trades at $1270 to yield 2%. Calculte the probability of default of the corporate bond in sheet1.

Sheet 3: (name your sheet CDS)

 Calculate the 5-year CDS of the corporate bond with the p(def) you found on Sheet 2. assume 40% recovery rate and a notional of $10 000 000 and corporate event on the bond occurs in June 2010.

Sheet 4: (name your sheet Conclusion)

 What do you notice on your CDS price when the spread between your risk free and corporate bond widens ? Can you find any correlation between the 2?