2. You collect the following data on the yields of French Government bonds (OATs) and Renault bonds, as well as Renault CDS prices (all denominated in euros): Maturity (yrs) OATS Renault Bonds Renault CDS 3 -.35% -.21% -.05% .33% .60% 5 7 65 bps 80 bps 95 bps .88% a) Which maturity offers the best yield relative to OAT yields (i.e., residual spread) if you decide to buy Renault bonds and hedge with Renault CDS? 3 b) Assume Renault issued a new euro-denominated 4-year bond at par with a coupon (= yield) of .49% p.a. Would you probably choose this bond for your strategy over your choice in part a) assuming you were indifferent to maturity? Explain your answer (Hint: use interpolation here). 2. You collect the following data on the yields of French Government bonds (OATs) and Renault bonds, as well as Renault CDS prices (all denominated in euros): Maturity (yrs) OATS Renault Bonds Renault CDS 3 -.35% -.21% -.05% .33% .60% 5 7 65 bps 80 bps 95 bps .88% a) Which maturity offers the best yield relative to OAT yields (i.e., residual spread) if you decide to buy Renault bonds and hedge with Renault CDS? 3 b) Assume Renault issued a new euro-denominated 4-year bond at par with a coupon (= yield) of .49% p.a. Would you probably choose this bond for your strategy over your choice in part a) assuming you were indifferent to maturity? Explain your answer (Hint: use interpolation here)