2. You are holding four units of a sovereign junk bond. The face value and the...

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2. You are holding four units of a sovereign junk bond. The face value and the recovery rate are respectively $1000 and 70%. The term to maturity is 5 years. If the country defaults at any time in the coming 5 years, the recovery rate will be paid at the maturity day. The price of the bond is $600. a) If the bond is Caa-rated, find the probability of defaults using the table of historical default rate. b) Suppose a 5-year zero coupon US treasury bond with face value of $100 is selling at $97, what would be the default probability of the junk bond implied from the market price? c) Using each of the probabilities obtained from a) & b) calculate the expected value and variance of your credit loss. 2. You are holding four units of a sovereign junk bond. The face value and the recovery rate are respectively $1000 and 70%. The term to maturity is 5 years. If the country defaults at any time in the coming 5 years, the recovery rate will be paid at the maturity day. The price of the bond is $600. a) If the bond is Caa-rated, find the probability of defaults using the table of historical default rate. b) Suppose a 5-year zero coupon US treasury bond with face value of $100 is selling at $97, what would be the default probability of the junk bond implied from the market price? c) Using each of the probabilities obtained from a) & b) calculate the expected value and variance of your credit loss.

Answer rating: 100% (QA)

2a The bond is Caarated Looking at the historical default rate table Rating Caa Time to maturity 5 y... View the full answer