Scribd
Upload
3 views2 pages

credit 관련 solution

The document presents two problems related to corporate bonds and credit default swaps, focusing on estimating risk-neutral default probabilities and credit default swap spreads. In Problem 23.12, a four-year corporate bond with a 4% coupon and a yield of 5% leads to an implied default probability of 2.74% per year. Problem 24.8 involves a five-year credit default swap with a flat risk-free curve at 7%, resulting in a credit default swap spread of 221 basis points.

Uploaded by

yennguyen.524102110687
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
3 views2 pages

credit 관련 solution

The document presents two problems related to corporate bonds and credit default swaps, focusing on estimating risk-neutral default probabilities and credit default swap spreads. In Problem 23.12, a four-year corporate bond with a 4% coupon and a yield of 5% leads to an implied default probability of 2.74% per year. Problem 24.8 involves a five-year credit default swap with a flat risk-free curve at 7%, resulting in a credit default swap spread of 221 basis points.

Uploaded by

yennguyen.524102110687
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Problem 23.12.

A four-year corporate bond provides a coupon of 4% per year payable semiannually


and has a yield of 5% expressed with continuous compounding. The risk-free yield curve is
flat at 3% with continuous compounding. Assume that defaults can take place at the end of
each year (immediately before a coupon or principal payment and the recovery rate is 30%.
Estimate the risk-neutral default probability on the assumption that it is the same each year.

Define as the risk-free rate. The calculations are as follows

Time Def. Recovery Risk-free Loss Given Discount PV of Expected


(yrs) Prob. Amount ($) Value ($) Default ($) Factor Loss ($)

1.0 30 104.78 74.78 0.9704

2.0 30 103.88 73.88 0.9418

3.0 30 102.96 72.96 0.9139

4.0 30 102.00 72.00 0.8869

Total

The bond pays a coupon of 2 every six months and has a continuously compounded
yield of 5% per year. Its market price is 96.19. The risk-free value of the bond is obtained by
discounting the promised cash flows at 3%. It is 103.66. The total loss from defaults should
therefore be equated to . The value of implied by the bond price is
therefore given by . or . The implied probability of default is
2.74% per year.

Problem 24.8.
Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding
and that defaults can occur half way through each year in a new five-year credit default
swap. Suppose that the recovery rate is 30% and the default probabilities each year
conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume
payments are made annually.

The table corresponding to Tables 24.1, giving unconditional default probabilities, is

Time (years) Default Probability Survival Probability


1 0.0300 0.9700
2 0.0291 0.9409
3 0.0282 0.9127
4 0.0274 0.8853
5 0.0266 0.8587
The table corresponding to Table 24.2, giving the present value of the expected regular
payments (payment rate is per year), is

Time (yrs) Probability of Expected Discount Factor PV of Expected


survival Payment Payment
1 0.9700 0.9700s 0.9324 0.9044s
2 0.9409 0.9409s 0.8694 0.8180s
3 0.9127 0.9127s 0.8106 0.7398s
4 0.8853 0.8853s 0.7558 0.6691s
5 0.8587 0.8587s 0.7047 0.6051s
Total 3.7364s

The table corresponding to Table 24.3, giving the present value of the expected payoffs
(notional principal =$1), is

Time (yrs) Probability of Recovery Expected Discount PV of


default Rate Payoff Factor Expected
Payment
0.5 0.0300 0.3 0.0210 0.9656 0.0203
1.5 0.0291 0.3 0.0204 0.9003 0.0183
2.5 0.0282 0.3 0.0198 0.8395 0.0166
3.5 0.0274 0.3 0.0192 0.7827 0.0150
4.5 0.0266 0.3 0.0186 0.7298 0.0136
Total 0.0838

The table corresponding to Table 24.4, giving the present value of accrual payments, is

Time (yrs) Probability of Expected Accrual Discount PV of Expected


default Payment Factor Accrual Payment
0.5 0.0300 0.0150s 0.9656 0.0145s
1.5 0.0291 0.0146s 0.9003 0.0131s
2.5 0.0282 0.0141s 0.8395 0.0118s
3.5 0.0274 0.0137s 0.7827 0.0107s
4.5 0.0266 0.0133s 0.7298 0.0097s
Total 0.0598s

The credit default swap spread is given by:

It is 0.0221 or 221 basis points.

You might also like