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1 Coupon payment date Nov-01

Bought Mar-02
Rate 4% semiannually

Accrued Interest 1.32%

2 Expected Loss = Probability Of Default * Loss given Default


EL 1.26%

3 Promised annual yield = 5.80%

Expected Annual Yield = 5.727%

4 FV 1000
Maturity 20 years
Equal annual amortization 50

(i) So, Principal received each year 50


(ii) Coupon 4%

Yr 1 Yr 2
Principal 1000 950
Coupon 40 38

5 FV 1000 Jan-17

Callable at Reciept
a 103 Jan-19 1030
b 102 Jan-20 1020
c 101 Jan-21 1010
d 100 Jan-22 1000

e IBM will likely call the bond after 2022, so that it doesn't have to pay

6 Convertible bond 40 shares for each $1000 bond

a Share price 25 so, at any stock price grea

b Yes

Profit 160 = (stock price (29) * no. of shares(4


EXPLANATIONS

May-01 No. of Days between Nov to March =

emiannually Accrued Interest =(120/365)*(4%)

s given Default
(Self Explanatory)

Expected annual yield = promised yield * expec

Principal is amortized equally over 20 years, wh

Every year, 50 is amortized, coupon is paid on o

It means , in Jan 2019, if redeemed, you will get

at it doesn't have to pay a premium on principal

o, at any stock price greater than $25, you make profit

ce (29) * no. of shares(40) ) - value of bond (1000))


S

120

=(120/365)*(4%) 1.32%

= promised yield * expected loss

qually over 20 years, which means every year you get back (1000/20) = 50 of you principal back

tized, coupon is paid on outstanding principal

if redeemed, you will get 103% of your face value which is 103%*1000 = 1030. (Interest calculations were to be
cipal back

st calculations were to be ignored as per question)