2. You collect the following data on the yields of French Government bonds (OATS) and Renault...

 

Transcribed Image Text:

2. You collect the following data on the yields of French Government bonds (OATS) and Renault bonds, as well as Renault CDS prices (all denominated in euros): Maturity (yrs) OATS Renault Bonds Renault CDS 3 5 -.35% .33% 65 bps -.21% .60% 80 bps 7 -.05% .88% 95 bps a) Which maturity offers the best yield relative to OAT yields (i.e., residual spread) if you decide to buy Renault bonds and hedge with Renault CDS? 3 b) Assume Renault issued a new euro-denominated 4-year bond at par with a coupon (yield) of .49% p.a. Would you probably choose this bond for your strategy over your choice in part a) assuming you were indifferent to maturity? Explain your answer [Hint: use interpolation here]. 2. You collect the following data on the yields of French Government bonds (OATS) and Renault bonds, as well as Renault CDS prices (all denominated in euros): Maturity (yrs) OATS Renault Bonds Renault CDS 3 5 -.35% .33% 65 bps -.21% .60% 80 bps 7 -.05% .88% 95 bps a) Which maturity offers the best yield relative to OAT yields (i.e., residual spread) if you decide to buy Renault bonds and hedge with Renault CDS? 3 b) Assume Renault issued a new euro-denominated 4-year bond at par with a coupon (yield) of .49% p.a. Would you probably choose this bond for your strategy over your choice in part a) assuming you were indifferent to maturity? Explain your answer [Hint: use interpolation here].