Interest

rate

Hazard rate

Survival
Default
probability probabilty

Time
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02

0
6
12
18
24
30
36
42
48
54
60

1.00
0.98
0.96
0.94
0.92
0.90
0.89
0.87
0.85
0.83
0.82

0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02

Discount
rate
1.00
0.98
0.95
0.93
0.91
0.88
0.86
0.84
0.82
0.80
0.78

0.05

1yr bond: c =
5%, R= 10%

Coupon+Face

Discount
ed
Expected
value
d(0,t)*(q(t)*c + (1-q(t))*R)

Recovery

5
105

10
10

Price

4.98
96.17

101.15

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

2yr bond: c =
2%, R= 25%

Coupon+Face

Discount
ed
Expected
value
d(0,t)*(q(t)*c + (1-q(t))*R)

Recovery

2
2
2
102

25
25
25
25

Price

2.40
2.29
2.19
85.66

92.55

Coupon+
Face

5
5
5
5
5
105

4yr bond:
c = 5%,
R=10%
Discount
ed
Expected
Recovery value
d(0,t)*(q(t)*c + (1-q(t))*R)
50
50
50
50
50
50

Price

5.76
5.50
5.26
5.03
4.81
80.98

107.35

Discount
ed
Coupon+
Expected
Face
Recovery value
d(0,t)*(q(t)*c + (1-q(
5
5
5
5
5
5
5
105

10
10
10
10
10
10
10
10

Price

4.98
4.76
4.55
4.35
4.16
3.98
3.80
73.46

104.02

(0,t)*(q(t)*c + (1-q(t))*R)

5yr bond:
c=10%,
R=20%
Discount
ed
Coupon+
Expected
Face
Recovery value
d(0,t)*(q(t)*c + (1-q(t))*R)
10
10
10
10
10
10
10
10
10
110

20
20
20
20
20
20
20
20
20
20
Price

9.95
9.51
9.10
8.70
8.32
7.95
7.60
7.27
6.95
70.47
145.82

Interest

Hazard rate Time

0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02

Survival probaDefault probab

Discount rate
0
6
12
18
24
30
36
42
48
54
60

1.00
0.98
0.96
0.94
0.92
0.90
0.89
0.87
0.85
0.83
0.82

0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02

1.00
0.98
0.95
0.93
0.91
0.88
0.86
0.84
0.82
0.80
0.78

0.05

1yr bond: c =
5%, R= 10%
Coupon+Face

5
105

Recovery

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
10
10

Model Price
True Price
Error
Sum Error

4.98
96.14

101.12
101.18
0.00
0.02

2yr bond: c =
8%, R= 25%
Coupon+Face

2
2
2
102

Recovery

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
25
25
25
25

2.40
2.30
2.18
85.72

Model Price
True Price
Error

92.60
92.57
0.00

3yr bond:
c = 5%,
R= 50%
Coupon+Fa

5
5
5
5
5
105

Recovery

Discounted Expected value

d(0,t)*(p(t)*c + (1-p(t))*R)
50
50
50
50
50
50

Model Price
True Price
Error

5.76
5.51
5.24
5.01
4.81
81.06

107.39
107.39
0.00

4yr bond:
c = 5%,
R=10%
Coupon+Fa
Recovery

5
5
5
5
5
5
5
105

10
10
10
10
10
10
10
10

Model Price
True Price
Error

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
4.98
4.76
4.54
4.35
4.16
3.98
3.80
73.51

104.08
104.06
0.00

5yr bond:
c=10%,
R=20%
Coupon+Fa
Recovery

10
10
10
10
10
10
10
10
10
110

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
20
20
20
20
20
20
20
20
20
20

Model Price
True Price
Error

9.95
9.51
9.09
8.69
8.32
7.96
7.61
7.27
6.95
70.59
145.95
145.83
0.01

iscounted Expected value

(0,t)*(q(t)*c + (1-q(t))*R)

Spread
Principal

301.51
10,000,000

Recovery

0.25

Interest

0.05

Month

Expected
Survival
value of PV of
Hazard
probability Fixed
premium premium
Discount
rate
(%)
payment
(ExD)
(NxFxB)
0
1.00
0.010
100.0
3
0.99
0.010
99.0
75.4
74.62
73,702
6
0.98
0.010
98.0
75.4
73.88
72,064
9
0.96
0.010
97.0
75.4
73.14
70,463
12
0.95
0.010
96.1
75.4
72.41
68,897
15
0.94
0.010
95.1
75.4
71.68
67,366
18
0.93
0.010
94.1
75.4
70.97
65,869
21
0.92
0.010
93.2
75.4
70.26
64,405
24
0.91
0.010
92.3
75.4
69.55
62,974
27
0.89
0.010
91.4
75.4
68.86
61,574
30
0.88
0.010
90.4
75.4
68.17
60,206
33
0.87
0.010
89.5
75.4
67.49
58,868
36
0.86
0.010
88.6
75.4
66.81
57,560
39
0.85
0.010
87.8
75.4
66.14
56,281
42
0.84
0.010
86.9
75.4
65.48
55,030
45
0.83
0.010
86.0
75.4
64.83
53,807
48
0.82
0.010
85.1
75.4
64.18
52,612
51
0.81
0.010
84.3
75.4
63.54
51,442
54
0.80
0.010
83.5
75.4
62.90
50,299
57
0.79
0.010
82.6
75.4
62.27
49,181
60
0.78
0.010
81.8
75.4
61.65
48,089

Accrued
interest
(E/2xG)

Default
Prob. (%)
1.0
1.0
1.0
1.0
1.0
1.0
0.9
0.9
0.9
0.9
0.9
0.9
0.9
0.9
0.9
0.9
0.9
0.8
0.8
0.8

0.38
0.37
0.37
0.37
0.36
0.36
0.35
0.35
0.35
0.34
0.34
0.34
0.33
0.33
0.33
0.32
0.32
0.32
0.31
0.31

PV of
accrued
interest
(NxIxB)
372.23
363.96
355.87
347.96
340.23
332.67
325.28
318.05
310.98
304.07
297.31
290.71
284.25
277.93
271.75
265.71
259.81
254.04
248.39
242.87

Expected
Protection
payment
(1-R)H
0.0075
0.0074
0.0074
0.0073
0.0072
0.0071
0.0071
0.0070
0.0069
0.0069
0.0068
0.0067
0.0066
0.0066
0.0065
0.0065
0.0064
0.0063
0.0063
0.0062

PV of
expected
protection
payment
(NxKxB)
74,074.07
72,427.98
70,818.47
69,244.73
67,705.96
66,201.38
64,730.24
63,291.79
61,885.30
60,510.08
59,165.41
57,850.62
56,565.05
55,308.05
54,078.98
52,877.23
51,702.18
50,553.24
49,429.83
48,331.39

Premium Leg
Protection Leg
Value

remium Leg
rotection Leg

1,206,751.99
1,206,751.99
0.00