Formulas

Basis for determining the credit spread: (1 + 𝑟) = (1 − 𝑝)(1 + 𝑟 + 𝑠) + 𝑝𝑅

𝑆 𝑆
𝐸(𝑟𝑖 ) ≡ 𝜇𝑖 = ∑ 𝑝𝑠 𝑟𝑖,𝑠 √𝑉𝑎𝑟(𝑟𝑖 ) ≡ 𝜎𝑖 = √∑ 𝑝𝑠 (𝑟𝑖,𝑠 − 𝜇𝑖 )2
𝑠=1 𝑠=1

𝐸(𝑟𝑝 ) = ∑ 𝑤𝑖 𝐸(𝑟𝑖 ) 𝜎𝑝 = √𝑤𝐴2 𝜎𝐴2 + 𝑤𝐵2 𝜎𝐵2 + 2𝑤𝐴 𝑤𝐵 𝜌𝐴,𝐵 𝜎𝐴 𝜎𝐵

𝑖=1
𝑁𝑉 𝐷1 + 𝑃1 − 𝑃0 𝐷1 𝑃1 − 𝑃0
𝑇𝑟𝑒𝑎𝑠𝑢𝑟𝑦 𝐵𝑖𝑙𝑙𝑠: 𝐴𝑉 = 𝑛 𝑟= = +
1+𝑖× 𝑃0 𝑃0 𝑃0
365
Gordon Growth model: Two-stage model:
𝐷1 𝐷0 (1 + 𝑔) 1+𝑔 𝑛
𝑃0 = = 𝐷1 [1 − ( 1 + 𝑟𝐴 ) ] 𝐷𝑛+1
𝑟−𝑔 𝑟−𝑔 𝑃0 = 𝐴
+
𝑟𝐴 − 𝑔𝐴 (𝑟𝐵 − 𝑔𝐵 )(1 + 𝑟𝐴 )𝑛
𝐷0 (1 + 𝑔𝐵 ) 𝐷0 𝐻(𝑔𝐴 − 𝑔𝐵 ) 𝐸𝑃𝑆1
𝐻 − 𝑚𝑜𝑑𝑒𝑙: 𝑃0 = + 𝑅𝑂𝐸 =
𝑟 − 𝑔𝐵 𝑟 − 𝑔𝐵 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 (𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒)
𝐷1
𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = = 1 − 𝑃𝑙𝑜𝑤𝑏𝑎𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 𝑔 = 𝑅𝑂𝐸 × 𝑃𝑙𝑜𝑤𝑏𝑎𝑐𝑘 𝑟𝑎𝑡𝑖𝑜
𝐸𝑃𝑆1
𝑛 𝑛
𝐶𝐹𝑡𝑗 𝐶𝐹𝑡𝑗
𝐵(0) = ∑ 𝑡𝑗 𝑇𝑉0 = ∑ 𝑡𝑗
𝑗=1 [1 + 𝑟(0; 𝑡𝑗 )] 𝑗=1 [1 + 𝑦𝑡𝑚𝑡𝑛 ]

𝐶𝐹𝑡𝑗 𝐶𝐹𝑡𝑗
∑𝑛𝑗=1 {𝑡𝑗 𝑡𝑗 } ∑𝑛𝑗=1 {𝑡𝑗 }
[1 + 𝑟(0; 𝑡𝑗 )] [1 + 𝑟]𝑡𝑗
𝐷𝐹𝑊 = 𝐷𝑀 =
𝐵(0) 𝐵(0)
𝐷 𝜕𝑃0 /𝑃0 1
𝑀𝐷 = =− ×𝐷
1+𝑦 𝜕𝑦 1+𝑦
𝐶𝐹𝑡𝑗
∑𝑛𝑗=1 [ (𝑡 2 + 𝑡𝑗 )] ∆𝑃0 (∆𝑦)2
(1 + 𝑦)𝑡𝑗 𝑗 =𝐶× − 𝑀𝐷 × ∆𝑦
𝐶= 𝑃0 2
𝑃0 × (1 + 𝑦)2
𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
𝑀𝑘𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑢𝑛𝑑 × (1 − 𝑚𝑓 − 𝑐𝑓) 𝑁𝐴𝑉 = 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
= × 𝑁𝑟. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝑁𝑟. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝑅𝑒𝑡𝑢𝑟𝑛 − 𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒 𝑅𝑒𝑡𝑢𝑟𝑛 − 𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒
𝑇𝑟𝑒𝑦𝑛𝑜𝑟 𝑟𝑎𝑡𝑖𝑜 = 𝑆ℎ𝑎𝑟𝑝𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝐵𝑒𝑡𝑎 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑢𝑛𝑑 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡. 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑢𝑛𝑑
⁄𝑛
𝑉𝑛 (1 − 𝑟𝑓) 1
𝑁𝐸𝐴𝑅 = ( ) −1
𝑉0 (1 + 𝑠𝑓)
𝐴/𝐵 𝐴/𝐵 1 + 𝑟ℎ𝐵 𝐴/𝐵 ∆𝑆 𝐴⁄𝐵
𝐹𝑡+ℎ = 𝑆𝑡 𝐴 = 𝑆𝑒(𝑡+ℎ) ≅ 𝜋𝐵 − 𝜋 𝐴
1 + 𝑟ℎ 𝑆 𝐴⁄𝐵