John Omwodho is a fixed income analyst at Fiduciary Bank Limited. He is analysing the term...

 

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John Omwodho is a fixed income analyst at Fiduciary Bank Limited. He is analysing the term structure of credit spread for one of the bank's holdings, Patcom Limited. He obtains the following data on Patcom Limited's 5-year, 3% senior unsecured corporate bonds issued three years ago: Payment date 30/9/2014 31/3/2015 30/9/2015 31/3/2016 Risk-free rate (%) 0.15 0.22 0.25 0.27 Credit spread (%) 0.01 0.02 0.03 0.04 The rates given above are continuously compounded annual rates, and the par value of the bonds is Sh.1,000. Required: The present value of the expected loss for the corporate bond. b) Maxica Ltd. is a listed company based in Nairobi. The market value of the company's assets is Sh.100 million. The company also has a 1-year debt with a par value of Sh.70 million. The risk free rate is 5% and the volatility of asset value is 40%. The company uses Black-Scholes model to estimate the probability of default. Required: The probability of default for the one-year debt. Hint: Probability of default=1-N (d₂) Where: d₁ = ²n [2/2] + [ ₁₁ + 12/20²] t oft d₂ = d₂ - o√t So is the market price of underlying stock E is the exercise price. John Omwodho is a fixed income analyst at Fiduciary Bank Limited. He is analysing the term structure of credit spread for one of the bank's holdings, Patcom Limited. He obtains the following data on Patcom Limited's 5-year, 3% senior unsecured corporate bonds issued three years ago: Payment date 30/9/2014 31/3/2015 30/9/2015 31/3/2016 Risk-free rate (%) 0.15 0.22 0.25 0.27 Credit spread (%) 0.01 0.02 0.03 0.04 The rates given above are continuously compounded annual rates, and the par value of the bonds is Sh.1,000. Required: The present value of the expected loss for the corporate bond. b) Maxica Ltd. is a listed company based in Nairobi. The market value of the company's assets is Sh.100 million. The company also has a 1-year debt with a par value of Sh.70 million. The risk free rate is 5% and the volatility of asset value is 40%. The company uses Black-Scholes model to estimate the probability of default. Required: The probability of default for the one-year debt. Hint: Probability of default=1-N (d₂) Where: d₁ = ²n [2/2] + [ ₁₁ + 12/20²] t oft d₂ = d₂ - o√t So is the market price of underlying stock E is the exercise price.

Answer rating: 100% (QA)

Part a Present value of expected loss for the corporate bond 1 Given Par value of bond Kshs 1000 Mat... View the full answer