Please provide original answers to the following questions. Your answers should be no longer than 100 words long in a single paragraph. Please include a maximum of one illustration (e.g., chart,...

Please provide original answers to the following questions. Your answers should be no longer
than 100 words long in a single paragraph. Please include a maximum of one illustration (e.g.,
chart, table, or figure) per answer.
1. When will a bond trade at a discount? Par? At a premium? Which bonds will be the most
sensitive to changes in yields? Explain.
Solution:
Bond issuer looks at the different outstanding bonds which has similar maturity and risk. The
yield on these bonds are used to establish the coupon rate where it is necessary for a particular
issue so as to initially sell the bond at the par value. The bond issuer also simplifies the
determination of the coupon rate by asking the potential purchaser, they decide on the coupon
rate which attracts the investors. The required rate of return is the return which the investor is
wanting on the issue. When the bond is sold at the par then the coupon rate and required rate of
return is same. When the coupon rate is equal to the yield when the bonds are sold at par, when
the coupon rate of the bond is less than the market yield of the bond then the bond is sold at the
discount whereas when the coupon rate is more than the yield then the bonds are sold at
premium. The duration of the bond is the measure of the price sensitivity of the particular bond.
2. Provide an explanation of standardizations and conventions associated with credit default
swaps. Which did not exist before the Big Bang protocol?
Solution:
One of the financial innovations was credit derivatives, which were bets on the creditworthiness
of a particular company, like insurance on a loan. There were two types of credit derivatives:
credit default swaps and collateralized debt obligations. Credit default swaps were widely used,
especially by insurance companies such as the American International Group (AIG). Life
insurance companies invested in credit default swaps as assets. Parties involved in a credit
default swap agreed that one would pay the other if a particular borrower, a third party, could not
repay its loans. Credit default swaps were used to transfer credit risks away from banks. A major
problem with credit default swaps was the lack of transparency. They were also unregulated.
Ultimately, credit default swaps created confusion and encouraged excessive risk taking. It was
difficult to determine where the risk ended up. Designed to pass on risks, loans were packaged as
securities. Collateralized debt obligations were linked to mortgage companies, which passed on
the risk. Mortgages, instead of being held by banks and mortgage companies, were sold to
investors shortly after the loans closed, and investors packaged them as securities.
3. What is the credit fixings methodology used to settle CDS?
Solution;
The collapse of the housing price bubble had a domino effect. With the souring of mortgages, the
value of mortgage-backed securities collapsed. Investment banks had built huge portfolios of
such derivatives and the most heavily exposed of these banks risked...