2. Suppose that: (i) The spread on a 5-year par floater bond issued by company X...
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2. Suppose that: (i) The spread on a 5-year par floater bond issued by company X is 3% (ii) A 5-year credit default swap providing insurance against the default of company X charges a premium rate of 250 basis points per year (a) Is it advantageous to hold the risky par floater and buy the default protection via the credit default swap? Give an explanation to your answer. (b) What arbitrage opportunity would there be if the credit default spread were 400 basis points instead of 250 basis points? [2] [3] 2. Suppose that: (i) The spread on a 5-year par floater bond issued by company X is 3% (ii) A 5-year credit default swap providing insurance against the default of company X charges a premium rate of 250 basis points per year (a) Is it advantageous to hold the risky par floater and buy the default protection via the credit default swap? Give an explanation to your answer. (b) What arbitrage opportunity would there be if the credit default spread were 400 basis points instead of 250 basis points? [2] [3]
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a It is advantageous to hold the risky par floater and buy th... View the full answer
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