SECTION B - Answer ALL Questions Question 1 Consider a 5-year bond with a face value of $100 that pays an annual coupon of #% and is currently rated BBB. The expected recovery rate in case of default is 51.13%. In the table below, you are given the probabilities that in one year (i) the bond issuer maintains its BBB rating, (ii) is upgraded to AAA, AA or A or downgraded to BB, B or CCC and (hii) defaults. Rating Probability (X) AAA AA 033 A 595 BBB 16.93 BB 5.3 B 1.17 CCC 012 Default 018 Consider also the one-year forward yield curve for zero-coupon bonds with different maturities and credit ratings (rates are discretely compounded): Years to Maturity Rating 1 year 2 years 3 years 4 years AAA 360%% 4.17% 4.73% 5.12% AA 3.65% 4.22%% 4.70% 5.17% A 3.72% 4.32% 1.93% 5.32% BBB 4.10% 4.679 5.25% 5.63% BB 5.55% 6.02% 6.70 7.27% 6105% 7.02% 103% 0.52% CCC 15.05% 15.02% 1403% 13.52% See Next Page Page 3 of 5 7 55MM707 a) Compute the volatility of the above bond in one year. by is the volatility a coherent risk measure? Explain. C) Compute the 1-year Value-at-Risk and Expected Shortfall of the above bond at a 99% confidence level. [25 marks]