hyx

金融

1.What are the yields to maturity (YTM) on the three corporate bonds?

2.Assuming the reported credit ratings are correct and that the market yields for those ratings are the appropriate expected returns (benchmarks) for the bonds, quantify the attractiveness of the bonds in two ways:

1. Comparing the yield to the benchmark yield;
2. Comparing the current price to the benchmark yield implied price

3.Janet O’Brien suggests that the bond ratings are incorrect. Assuming that O’Brien’s alternative ratings (a full category improvement) are the appropriate expected returns for the bonds, once again quantify quantify the attractiveness of the bonds in two ways:

1. Comparing the yield to the benchmark yield;
2. Comparing the current price to the benchmark yield implied price

4.Explore how sensitive the two longest term bond prices are to the assumed YTMs. How do the results compare across the two bonds? What might explain this difference?

5.O’Brien noted that all three bonds were callable by the issuer. A colleague suggested that this characteristic dampened the price sensitivity of the bond to changes in interest rates across the entire yield spectrum. Is this true or false? Explain your rationale.

6.O’Brien wanted to formally model the default risk of the three companies using quantitative methods, rather than relying on credit ratings. She had been encouraged by colleagues to investigate the use of structural models and had heard that they use options pricing theory as a central tenet. How do these models use insights from options pricing theory to theoretically link the equity and debt of a firm? How does this approach allow us to estimate default probabilities from market data?

O’Brien had also been debating investment of some of the Wilson Family Foundation’s funds into treasury securities. The Wilson Foundation had developed a proprietary model which faciltated term structure forecasts conditioned on macroeconomic data and technical trading information. These forecasts suggested a fairly priced term structure of theoretical spot rates (i.e. zero coupon equivalent rates) that looked as follows:

O’Brien did not have access to par yield data but noted the following pricing of off-the-run treasuries in the market currently：

1. By comparing forecast rates with those priced in the market, what ate the three most profitable treasury arbitrage trades that O’Brien might place on behalf of the Wilson Family Foundation? What would be the return on each of those trades assuming that that the proprietary forecasting model yields accurate predictions over the horizon during which the funds are invested, that all trading costs and brokerages charges zero and that the Foundation did not face any restrictions in relation to short selling?
   O’Brien noted that there had been considerable friction between the US President and the Chair of the Federal Reserve. She worried that inconsistencies between monetary and fiscal policies might undermine the ability of the US to keep its AAA credit rating. Therefore, she wanted to structure any arbitrage trading of the Foundation such that the treasury element of the portfolio would be neutral to US credit risk.
2. Assuming any credit downgrade would shift the term structure of treasury rates outward in a parallel fashion how might O’Brien structure her treasury trades to ensure the highest possible return in a manner consistent with the Foundation’s preference for risk? What is the estimated return (again assuming that any trading or brokerage costs are zero and that the proprietary forecasting model yields accurate predictions)?

O’Brien had also debated investing some of the Foundation’s money in the asset backed security (ABS) market. She had primarily looked at ABS backed by commercial real estate. She was somewhat sceptical of the credit ratings attached to tranches of these securities.
9. Explain why accurate default correlation modelling is vital to the pricing and risk assessment of the tranches of an asset backed security. In addition, explain why O’Brien might be sceptical about the ratings attached to these tranches?