Explain what is meant by a 5-year credit debt swap (CDS) premium on Company XYZ and...
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Explain what is meant by a 5-year credit debt swap (CDS) premium on Company XYZ and what a CDS premium of 300 basis points on its debt would mean assuming the face value of the contract is $10 million and payments on the contract are made quarterly. Discuss what is likely to happen to the credit default swap premium, if there is news that Company XYZ is in severe financial problems. (iii) Explain what is meant by a collateralized debt obligation (CDO) if the CDO is based on and underlying package of $300 million of home loans yielding 8% interest and the CDO is split into four tranches. An equity tranche ($30 million), a junior tranche ($90 million), mezzanine tranche ($90 million) and a senior tranche ($90miillion). Comment on any credit rating of each tranche and apply an applicable rate of interest to each tranche you wish to apply to each of the 4 tranches. Explain what is meant by a 5-year credit debt swap (CDS) premium on Company XYZ and what a CDS premium of 300 basis points on its debt would mean assuming the face value of the contract is $10 million and payments on the contract are made quarterly. Discuss what is likely to happen to the credit default swap premium, if there is news that Company XYZ is in severe financial problems. (iii) Explain what is meant by a collateralized debt obligation (CDO) if the CDO is based on and underlying package of $300 million of home loans yielding 8% interest and the CDO is split into four tranches. An equity tranche ($30 million), a junior tranche ($90 million), mezzanine tranche ($90 million) and a senior tranche ($90miillion). Comment on any credit rating of each tranche and apply an applicable rate of interest to each tranche you wish to apply to each of the 4 tranches.
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