You invest $200 in a newly listed corporate bond. The promised payback on this bond in 2 years'time is $220. You estimate that there is a 2% probability that the company will default on the bondwith a recovery of 10% of the promised amount. There is also an 8% probability that the companywill default on the bond and you will be able to recover 70% of the promised amount. With 90%probability, the company will not default and repay the bond in full. What is the 90%-VaR on thisbond?$154O $220O $0$66None of the other answers are correct. An oil refiner can refine crude oil to produce jetfuel. The production plans of the refiner involveacquiring crude at the start of February 2021 and selling jet fuel at the end of February. The refinercan hedge the associated cash flows byO shorting crude oil futures contracts that mature at the end of January 2021 and shorting jetfuel futurescontracts that mature at the end of February 2021.O shorting crude oil futures contracts that mature at the end of January 2021 and buying jetfuel futurescontracts that mature at the end of February 2021.O going long in crude oil futures contracts that mature at the end of January 2021 and buying jetfuel futurescontracts that mature at the end of February 2021.O shorting jetfuel fuel futures contracts that mature at the end of January 2021 and buying crude oil futurescontracts that mature at the end of February 2021.O buying crude oil futures contracts that mature at the end of January 2021 and shorting jetfuel futurescontracts that mature at the end of February 2021.

Value at Risk(VAR)- It measures the maximum loss a portfolio of investments can incur given normal…

You invest $200 in a newly listed corporate bond. The promised payback on this bond in 2 years' time is $220. You estimate that there is a 2% probability that the company will default on the'bond with a recovery of 10% of the promised amount. There is also an 8% probability that the company will default on the bond and you will be able to recover 70% of the promised amount. With 90% probability, the company will not default and repay the bond in full. What is the 90%-VaR on this bond? O $154 O $220 O SO

You invest $200 in a newly listed corporate bond. The promised payback on this bond in 2 years' time is $220. You estimate that there is a 2% probability that the company will default on the'bond with a recovery of 10% of the promised amount. There is also an 8% probability that the company will default on the bond and you will be able to recover 70% of the promised amount. With 90% probability, the company will not default and repay the bond in full. What is the 90%-VaR on this bond? O $154 O $220 O SO

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

An insurance company is thinking about purchasing bonds A and B with zero coupons to cover some of its future liabilities. The redemption periods for these zero-coupon bonds are seven and twenty years, respectively.£11 million is due in 11 years, and £14 million is due in 16 years, according to the list of its liabilities.Determine bond B's value at an effective 5% annual interest rate so that Redington's theory of immunization's first two requirements are met. (correct answer=6.419) (using formulas, no tables)
You will be paying $10,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%.a. What is the present value and duration of your obligation?b. What maturity zero-coupon bond would immunize your obligation? c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?d. What if rates fall immediately to 7%?
An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%.a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase?b. What must be the face value and market value of that zero-coupon bond?
You will be paying $8,600 a year In tultion expenses at the end of the next two years. Bonds currently yleld 7%. Q. What is the present value and duration of your obligation? b. What maturity zero-coupon bond would Immunize your obligation? c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately Increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tultion obligation? d. What if rates fall Immediately to 5% ? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D What is the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.) \table[[,,,],[Present value,,,,,],[Duration,,years,,,]]
Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 6.5%, payable annually, and a par value of $1,000. The 1-year interest rate is 6.5%. Next year, there is a 35% probability that interest rates will increase to 8% and a 65% probability that they will fall to 5%. What will the market value of these bonds be if they are noncallable?
A BobCo bond with a face value of $100 matures in one year. There is a 50% chance that BobCo will go bankrupt in the next year, in which case the holder of the bond receives $90. If the current market price of the BobCo bond is $87, what is the (risk-free) market interest rate in percent?
A company must make a payment of $2500 in 5 years. Four-year zero coupon bonds and seven-year zero coupon bonds are available for investment. These bonds could be purchased in any quantity and the yield rate is 3% effective. Let A and B be the face values of the 4-year and 7-year zero-coupon bonds, respectively, that are purchased to satisfy full immunization against any changes in interest rates. Find A. Possible Answers A 1262 1431 C 1618 D 1725 E 1962
One of Carson City Airlines' two bonds is being considered by a businessman. Bond A offers a 7% annual coupon, while Bond B offers a 9% annual coupon. All bonds have a 10-year maturity, a $1,000 face value, and an 8% yield to maturity. Assume that all bonds' yields to maturity will stay stable for the next ten years. Which of the comments below is the most accurate?a. Bond A is now more expensive than Bond B, but the two bonds would be equal in price in a year.b. Now, Bond B is more expensive than Bond A, but in a year's time, the two bonds would be the same premium.c. The prices of all bonds are the same now, and the prices are supposed to stay the same before the bonds maturity.d. Bond A's price would be higher in a year than it is now.e. Bond A has a present yield of more than 8% (not to be mistaken with its yield to maturity).
Consider a $1,000-par junk bond paying a 10% annual coupon with two years to maturity. The issuing company has a 15% chance of defaulting this year; in which case, the bond would not pay anything. If the company survives the first year, paying the annual coupon payment, it then has a 20% chance of defaulting in the second year. If the company defaults in the second year, neither the final coupon payment nor par value of the bond will be paid. What price must investors pay for this bond to expect a 9% yield to maturity?
1. You borrow $1,500 and sign a contract that you will pay 1.6% interest rate. The inflation rate over the year ends up at 1.8%. This means that you real interest rate ends up being. 2. How much are you willing to pay for a bond with $1,000 face value and a 3% coupon rate with 2 years left to maturity? The current market interest rate on bonds with similar risk is 3%. The coupon payments are annual.
A firm has issued bonds with a remaining maturity of 1 year, face value of $100 and an annual coupon rate of 5% (there is only one coupon payment left, to be paid one year from now). You observe that the price of the bonds is $94. What is the yield on the bonds today? Suppose that investors expect a 4% return on other bonds with similar maturity and risk and forecast that if the bond defaults, bond holders will get paid 70% of the coupon payments and principal value they are owed (i.e., a 70% recovery rate). What is the expected cash flow of the bonds at time 1? What is the probability of default implied by current bond prices?
An insurance company must make payments to a customer of $20 million in 1 year and $8 million in 5 years. The yield curve is flat at 10%. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? (in years, use four decimal places) What must be the face value and market value of that zero-coupon bond? (in millions, use two decimal places)

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