Duncan Windham, a credit analyst for Lakeside Asset Management, is considering an investment in a BBB-rated...

 

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Duncan Windham, a credit analyst for Lakeside Asset Management, is considering an investment in a BBB-rated corporate bond, but worried about the return impact of a rating change. Windham developed the rating transition matrix below: Transition Matrix (%) From/To AAA AA A BBB BB B CCC, CC, C AAA 85.00 Rating: Credit Spread: 0.75 0.10 0.05 0.00 0.50 0.75 0.05 0.01 0.00 0.00 AA A B 11.00 2.50 0.10 87.00 9.00 0.05 2.50 88.00 0.50 1.20 4.50 86.55 5.50 1.50 5.25 81.25 8.50 77.30 18.50 0.15 0.10 0.89 The average credit spread for each ratings category is: A 1.60% AAA 0.75% BBB BB 1.20 0.15 3.00 0.15 8.00 0.70 AA 1.20% 1.25 9.00 1.50 BBB BB 2.40% 3.20% CCC, CC, C 0.05 0.03 0.12 0.50 2.25 8.25 48.50 B 5.30% ccc, cc, c 10.30% Windham intends to hold the bond for one year. If the modified duration of the selected bond at the end of the holding period is 6.55 and there is no default what is the expected percentage change in the bond's price due to credit migration? (3 points) Duncan Windham, a credit analyst for Lakeside Asset Management, is considering an investment in a BBB-rated corporate bond, but worried about the return impact of a rating change. Windham developed the rating transition matrix below: Transition Matrix (%) From/To AAA AA A BBB BB B CCC, CC, C AAA 85.00 Rating: Credit Spread: 0.75 0.10 0.05 0.00 0.50 0.75 0.05 0.01 0.00 0.00 AA A B 11.00 2.50 0.10 87.00 9.00 0.05 2.50 88.00 0.50 1.20 4.50 86.55 5.50 1.50 5.25 81.25 8.50 77.30 18.50 0.15 0.10 0.89 The average credit spread for each ratings category is: A 1.60% AAA 0.75% BBB BB 1.20 0.15 3.00 0.15 8.00 0.70 AA 1.20% 1.25 9.00 1.50 BBB BB 2.40% 3.20% CCC, CC, C 0.05 0.03 0.12 0.50 2.25 8.25 48.50 B 5.30% ccc, cc, c 10.30% Windham intends to hold the bond for one year. If the modified duration of the selected bond at the end of the holding period is 6.55 and there is no default what is the expected percentage change in the bond's price due to credit migration? (3 points)

Answer rating: 100% (QA)

The expected percentage change in the bonds price due to credit migration can be calculated using th... View the full answer