Exam 12: Financial Engineering and Security Design

In a single name CDS, the counterparty providing the credit insurance is called the .

Assume the price of Mary, Inc. stock is $56.00, interest rates are 4.8%, div yield = 0, and σ = 0.35. What is the price of a $1,000 par value 2-year price-participation note paying a 5.0% annual coupon and receiving 50.0% of all price appreciation above $65.00?

A risky bond promises to pay $4,000 at the end of three years. The bond has a risk neutral probability of default of 20%. If in default, the bondʹs residual payout will be $3,200. If the risk free rate is 6%, what is likely price of the bond today?

Which CDO claim has the most risk?

Assume the spot price of pork bellies is 74.50 cents per pound and the 2-year forward price is 77.30 cents. Annualized 1-year and 2-year forward interest rates are 5.0% and 5.2%, respectively. For a commodity-linked note to sell at par, what is the annual coupon?

Assume the spot price of corn is $2.30 per bushel and the 3-year forward price is $2.45. Annualized 1-year, 2-year, and 3 year interest rates are 4.2%, 4.4%, and 4.6%, respectively. For a commodity-linked note to sell at par, what is the annual coupon?

Will, Inc. stock is $63.35 per share. The companyʹs quarterly dividend is forecasted as $0.10 per share, increasing 5.0% every quarter. A coupon equity-linked bond, promising to pay 1 One share of Will, Inc. in 2 ₂ years pays a semi-annual coupon of $0.20. If annualized Interest rates are 8.0%, what is the price of the bond?

How does a coupon bond differ from an equity-linked bond?

Mel, Inc. stock is $135.00 per share. The companyʹs semi-annual dividend is forecasted as $2.10 per share, indefinitely. What is the price of a zero-coupon equity-linked bond, promising to pay one share in 3 years, given annual interest rates of 5.0%?

Instead of issuing a pure commodity-linked debt, why would the commodity producing firm consider a combining interest plus participation in the commodity price appreciation?

A risky bond promises to pay $1,000 at the end of the year. The bond has a risk neutral probability of default of 15%. If in default, the bondʹs residual payout will be $500. If the risk free rate is 6%, what is likely price of the bond today?

Albert, Inc. stock is $42.00 per share. The companyʹs quarterly dividend is forecasted as $0.50 per share, increasing 10.0% at the start of every year. What is the price of a zero-coupon equity-linked bond, promising to pay one share in 3 years, given annual interest rates of 8.0%?

In the following scenario, how much money does the protection buyer receive on this three year bond? The bond par value = $1,000. Bond market value = $872. Risk free interest rate = 4.0%. Non-defaulted bond value = $889.

A commodity linked bond is issued with an embedded call option. The current commodity price is $110, as is the exercise price on the call option. The call option is priced at $3.41. If the promised payment on the bond is the same as the issue price of $100, what is the implied coupon if effective interest rates are 3.0% and the bond has a 1-year maturity?

Wayne, Inc. stock is $40.00 per share. The companyʹs quarterly dividend is forecasted as $0.45 per share, indefinitely. A coupon equity-linked bond, promising to pay one share of Wayne, Inc. in 3 years pays a quarterly coupon of $0.50. If annual interest rates are 4.0%, what is the price of the bond?

What possible tax advantage exists in equity-linked notes?

A risky bond promises to pay $1,000 at the end of the year. The bond has a risk neutral probability of default of 20%. If in default, the bondʹs residual payout will be $600. If the risk free rate is 4%, what is the yield to maturity on this bond?

What is the primary difference between an equity-linked bond and a currency-linked bond?

A commodity linked bond is issued with an embedded call option. The current commodity price is $52, as is the exercise price on the call option. The call option is priced at $5.56. If the promised payment on the bond is the same as the issue price of $40, what is the yield on the bond if effective interest rates are 4.0% and the bond has a 1-year maturity?

What is the price of a 2-year equity-linked CD under the following terms? No coupon is paid. At maturity the CD pays 80.0% of the S&P 500 index appreciation. The S&P 500 price = 900, div = 0.02, σ = 0.20, and interest rates are 5.0%.