The job consist in pricing a portfolio of bonds which takes into account the issuer credit risk.

the input
parameters are: the par rate of a set of overnight index swap, a set of survival probabilities and the recovery
rate of the issuer, the static data of the pool of bonds. In order to price such a portfolio we introduce the
following assumptions: SLIDE CON LE ASSUMPTIONS: we assume that

The procedure to obtain the net present value of a single bond is the following: SLIDE PROCEDURE; then, we
iterate this procedure for the entire portfolio. FINISCE PRIMA PARTE

Since we already have some NDPs, we interpolate them to get the Credit Curve which will be used in
discounting the cash flows, in order to consider the issuer risk. GRAFICO CREDIT CURVE.

To obtain the discount factors needed to actualize the cashflows, we have to bootstrap them from the OIS
mkt quotes. GRAFICO DISCOUNT CURVE E CHI SI SENTE TEMERARIO GLI PARLA DI COME SI FA IL BOOSTRAP:
to obtain this discount curve we need to find the discount factor that makes equal the legs of a swap

contract; in particular we need to find:

compute the fixed and the floating leg:

Fixed leg = floating leg -----

Compute the discount factor from the previous relation:

FINITA LA SECONDA PARTE

Once we have obtained both the discount and the credit curves, we can compute the bond net present
value. DATI BOND. To do this we divide the bond in two cashflows: one referring to the coupon part that is
being receive and one referring to the cashflow that will be received in case of default. Than we sum the
two parts. RESULTS

As we can see the net present value is always less than the risk free net present value reflecting the fact that
we are willing to pay less for something that can default than something that does not present this risk. as
we can see, a longer maturity implies a lower net present value. moreover,an higher recovery rate gives an
higher npv because is directly related to the default leg. Further, we are adding to the mkt to mkt valuation,
the leg related to the counterparty risk which was completely neglected before. As we know the value of
the defaultable part, we could try to find on the market some contract that insures us against this loss, like a
CDS.

Now imagine that we do not have the NDPs, but we have to extract them from CDS mkt quotes. CDS DATA.

Notice that the CDS recovery is fixed at 0,40. PER CHI VOLESSE, BOOTSTRAP : In a no-arbitrage model, the
CDS spreads should make the present value of payments from the buyer (fixed leg) equal to the present
value of losses by the seller. We run the procedure to find the root of the function in order to find the NDPs
of the CDS. A credit default swap has two legs: fixed leg and default leg.

1)Fixed Leg:

2)Default Leg:

3)Fixed leg = Default leg:

=
4)Extract the NDP from the previous relation that makes the contract equal to zero, and get the Credit
Curve, that is, the set of the NDPs which will be used to discount the cashflows. CREDIT CURVE AND
RESULTS