suppose Bob holds a 10-year bond issued by company XYZ with a par value of $1,00
ID: 2716314 • Letter: S
Question
suppose Bob holds a 10-year bond issued by company XYZ with a par value of $1,000 and a coupon interest amount of $100 each year. Fearful that XYZ will default on its bond obligations, Bob enters into a CDS with Steve and agrees to pay him income payments of $20 (similar to an insurance premium) each year commensurate with the annual interest payments on the bond. In return, Steve agrees to pay Bob the $1,000 par value of the bond in addition to any remaining interest on the bond ($100 multiplied by the number of years remaining). If XYZ goes under a day before the end of year 4 coupon payments, what are the cash flows to bob for years 0 through 4 from the cds agreement? To Steve? -Show cash flow time - -show all work
Explanation / Answer
cash flows
(figuers in $)
it is assumed that the cds paymentis made at year begining and interest is received at end of the year
workings
cds settelment
numbers of years left = (10-3) = 7 years
interest = $100*7 = $700
bond value = $1000
Total = $ 1700
years particulars bob steve o purchase of bonds 1000 0 1 CDS payment -20 20 interest 100 0 2 cds payment -20 20 interest 100 0Related Questions
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