Interest

rate 0.05

1yr bond: c = 5%,

R= 10%

Survival Default Discount

Hazard rate Time probability probabilty rate Coupon+Face

0.02 0 1.00 1.00

0.02 6 0.98 0.02 0.98 5
0.02 12 0.96 0.02 0.95 105
0.02 18 0.94 0.02 0.93
0.02 24 0.92 0.02 0.91
0.02 30 0.90 0.02 0.88
0.02 36 0.89 0.02 0.86
0.02 42 0.87 0.02 0.84
0.02 48 0.85 0.02 0.82
0.02 54 0.83 0.02 0.80
0.02 60 0.82 0.02 0.78
 2yr bond: c = 2%,
R= 25%

Discounte Discounte
d d
Expected Expected
Recovery value Coupon+Face Recovery value
d(0,t)*(q(t)*c + (1-q(t))*R) d(0,t)*(q(t)*c + (1-q(t))*R)

10 4.98 2 25 2.40
10 96.17 2 25 2.29
2 25 2.19
102 25 85.66

Price 101.15 Price 92.55

 3yr bond: 4yr bond:
c = 5%, R= c = 5%,
50% R=10%

Discounte
d
Coupon+F Expected Coupon+F
ace Recovery value ace Recovery
t)*c + (1-q(t))*R) d(0,t)*(q(t)*c + (1-q(t))*R)

5 50 5.76 5 10
5 50 5.50 5 10
5 50 5.26 5 10
5 50 5.03 5 10
5 50 4.81 5 10
105 50 80.98 5 10
5 10
105 10

Price 107.35 Price

 5yr bond:
c=10%,
R=20%

Discounte Discounte
d d
Expected Coupon+F Expected
value ace Recovery value
d(0,t)*(q(t)*c + (1-q(t))*R) d(0,t)*(q(t)*c + (1-q(t))*R)

4.98 10 20 9.95
4.76 10 20 9.51
4.55 10 20 9.10
4.35 10 20 8.70
4.16 10 20 8.32
3.98 10 20 7.95
3.80 10 20 7.60
73.46 10 20 7.27
10 20 6.95
110 20 70.47

104.02 Price 145.82

 Interest r 0.05

1yr bond: c = 5%,

R= 10%
Hazard rate Time Survival probabiDefault probabiDiscount rate Coupon+Face

0.02 0 1.00 1.00

0.02 6 0.98 0.02 0.98 5
0.02 12 0.96 0.02 0.95 105
0.02 18 0.94 0.02 0.93
0.02 24 0.92 0.02 0.91
0.02 30 0.90 0.02 0.88
0.02 36 0.89 0.02 0.86
0.02 42 0.87 0.02 0.84
0.02 48 0.85 0.02 0.82
0.02 54 0.83 0.02 0.80
0.02 60 0.82 0.02 0.78
 2yr bond: c = 8%,
R= 25%
Recovery Discounted Expected value Coupon+Face Recovery Discounted Expected value
d(0,t)*(q(t)*c + (1-q(t))*R) d(0,t)*(q(t)*c + (1-q(t))*R)

10 4.98 2 25 2.40
10 96.14 2 25 2.30
2 25 2.18
102 25 85.72

Model Price 101.12 Model Price 92.60

True Price 101.20 True Price 92.58
Error 0.01 Error 0.00
Sum Error 0.02
 3yr bond: 4yr bond:
c = 5%, R= c = 5%,
50% R=10%
d Expected value Coupon+FaRecovery Discounted Expected value Coupon+Fa
t)*c + (1-q(t))*R) d(0,t)*(p(t)*c + (1-p(t))*R)

5 50 5.76 5
5 50 5.51 5
5 50 5.24 5
5 50 5.01 5
5 50 4.81 5
105 50 81.06 5
5
105

Model Price 107.39

True Price 107.35
Error 0.00
 5yr bond:
c=10%,
R=20%
Recovery Discounted Expected value Coupon+FaRecovery Discounted Expected value
d(0,t)*(q(t)*c + (1-q(t))*R) d(0,t)*(q(t)*c + (1-q(t))*R)

10 4.98 10 20 9.95
10 4.76 10 20 9.51
10 4.54 10 20 9.09
10 4.35 10 20 8.69
10 4.16 10 20 8.32
10 3.98 10 20 7.96
10 3.80 10 20 7.61
10 73.51 10 20 7.27
10 20 6.95
110 20 70.59

Model Price 104.08 Model Price 145.95

True Price 104.09 True Price 145.86
Error 0.00 Error 0.01
 d Expected value
t)*c + (1-q(t))*R)
Spread 218.89
Principal 1,000,000

Recovery 0.45

Interest 0.01

Expected
Survival value of PV of
Hazard probability Fixed premium premium Default Prob.
Month Discount rate (%) payment (ExD) (NxFxB) (%)
0 1.00 0.010 100.0
3 1.00 0.010 99.0 54.7 54.17 5,404 1.0
6 1.00 0.010 98.0 54.7 53.63 5,336 1.0
9 0.99 0.010 97.0 54.7 53.09 5,269 1.0
12 0.99 0.010 96.0 54.7 52.55 5,203 1.0
15 0.99 0.010 95.1 54.7 52.04 5,139 0.9
18 0.99 0.010 94.2 54.7 51.53 5,077 0.9
21 0.98 0.010 93.3 54.7 51.03 5,015 0.9
24 0.98 0.010 92.4 54.7 50.54 4,954 0.9

Premium Leg 41,603.28

Protection Leg 41,603.28
Value 0.00
 PV of
PV of Expected expected
Accrued accrued Protection protection
interest interest payment payment
(E/2xG) (NxIxB) (1-R)H (NxKxB)

0.28 27.48 0.0055 5,524.85

0.27 27.14 0.0055 5,455.57
0.27 26.80 0.0054 5,387.16
0.27 26.46 0.0054 5,319.61
0.26 25.23 0.0051 5,071.00
0.25 24.92 0.0051 5,009.18
0.25 24.62 0.0050 4,948.11
0.25 24.32 0.0050 4,887.79