financial-modeling-5thEdition

2. Consider the case of five possible rating states: A, B, C, D, and E. A, B, and C are ini- tial bond ratings, D symbolizes first-time default, and E indicates default in the previous period. Assume that the transition matrix II is: II = 1 0 0 0 0 0.06 0.90 0.03 0.01 0 0.02 0.05 0.88 0.05 0 0 0 0 0 1 0 0 0 0 1 A 10-year bond issued today at par with an A rating is assumed to bear a coupon rate of 7%. If a bond is issued today at par with a B rating and with a recovery percentage of 50%, what should be its coupon rate so that its expected return will also be 7%? If a bond is issued today at par with a C rating and with a recovery percentage of 50%, what should be its coupon rate so that its expected return will be 7%? 2. Consider the case of five possible rating states: A, B, C, D, and E. A, B, and C are ini- tial bond ratings, D symbolizes first-time default, and E indicates default in the previous period. Assume that the transition matrix II is: II = 1 0 0 0 0 0.06 0.90 0.03 0.01 0 0.02 0.05 0.88 0.05 0 0 0 0 0 1 0 0 0 0 1 A 10-year bond issued today at par with an A rating is assumed to bear a coupon rate of 7%. If a bond is issued today at par with a B rating and with a recovery percentage of 50%, what should be its coupon rate so that its expected return will also be 7%? If a bond is issued today at par with a C rating and with a recovery percentage of 50%, what should be its coupon rate so that its expected return will be 7%