Finance

An investment bank has created a CDO by pooling 100 bonds which will either pay off $0 (in case of default) or pay off $1.
The CDO has three risk classes rated AAA, BBB, and CCC with face values of $70, $20, and $10, respectively.
The current prices of the tranches are respectively, $66, $12, and $1.

Consider the strategy of buying one unit (out of 100 units) of the BBB class and shorting one unit of the AAA tranche.

How many bonds will have to default for this portfolio to make money?

Please help. I really don't know where to begin on this one. I really need help. thank you for helping.

  1. 👍 0
  2. 👎 0
  3. 👁 88
asked by Nabil

Respond to this Question

First Name

Your Response

Similar Questions

  1. Finance

    As an investor, you are considering an investment in the bonds of the Conifer Coal Company. The bonds, which pay interest semiannually, will mature in 8 years, have a coupon rate of 9.5% on a face value of $1,000. Currently, the

    asked by Kim on March 10, 2015
  2. Algebra

    Ernest receives $555 per year from his $7000 investment in municipal and corporate bonds. His municipal bonds pay 6% and his corporate bonds pay 9%. How much money is invested in each type of bond

    asked by Gman on April 1, 2011
  3. college algebra

    A $136000 trust is to be invested in bonds paying 8%, CDs paying 7%, and mortgages paying 10%. The bond and CD investment must equal the mortgage investment. To earn a $12040 annual income from the investments, how much should the

    asked by Anonymous on July 18, 2017
  4. Algebra

    A $148,000 trust is to be invested in bonds paying 7%, CDs paying 6%, and mortgages paying 8%. The bond and CD investment must equal the mortgage investment. To earn a $10,860 annual income from the investments, how much should

    asked by china on July 30, 2018
  5. finance

    s bonds trade at 100 today. the bonds pay semiannual interest that is paid on january 1 and july 1. the coupon on the bonds is 10 percent. how much will u pay for a s bond if today is march 1?

    asked by ad on August 23, 2011
  6. math - linear programming

    A woman wishes to invest $12,000 in three of bonds: municipal bonds paying 7% interest per year, bank investment certificates paying 8%, and high-risk bonds paying 12%. For tax reasons she wants the amount invested in municipal

    asked by Sky on December 1, 2012
  7. math

    A $76,000 trust is to be invested in bonds paying 8%, CDs paying 7%, and mortgages paying 10%. The bond and CD investment must equal the mortgage investment. To earn a $6670 annual income from the investments, how much should the

    asked by sandy on July 30, 2018
  8. Pre-Calculus

    An investor has $100,000 to invest in three types of bonds: short-term, intermediate-term, and long-term.How much should she invest in each type to satisfy the given conditions? Short-term bonds pay 4% annually, intermediate-term

    asked by Frank on February 28, 2016
  9. Math

    A person wishes to invest R120 000 in three types of bonds:  municipal bonds (MF) paying 6% p.a.,  bank investment certificates (BF) paying 7% p.a. and  high-risk bonds (HF) paying on average 10% p.a. For tax purposes,

    asked by Tshegofatso on March 6, 2018
  10. Economics

    An investor desires to make an investment in bonds provided he realize 10% on his investment. How much can he afford to pay for a $10000 bond that pays 7% interest annually and will mature 20 years hence?

    asked by Meme on April 7, 2013

More Similar Questions