Required:  a) Jordan Roberts has asked for your help in prep…

Required:  a) Jordan Roberts has asked for your help in preparing a report to the SRGCC board discussing the opportunity to convert the maintenance shop to a large events venue area. Prepare a memo discussing both quantitative and qualitative factors that Roberts should present to the board. b) As part of the analysis, Roberts would like to know what, if any, dividends could be paid out to the families from this expansion opportunity. I have provided you with 6 long answer input boxes to help you keep your memo organized. You do not have to use all the boxes. Long Answer Box 1

An investment bank wants to price a first-to-default basket…

An investment bank wants to price a first-to-default basket CDS on 2-year bonds issued by two companies, Gamma and Delta. The premium is paid at initiation and again after 1 year, provided that no default has occurred during the first year. The default probability for each company is 6% per year, the recovery rate is 0%, and the risk-free rate is 3%. Assume defaults happen at the end of each year, the two firms default independently, and the face value is 100 for all bonds. Calculate the premium for the first-to-default basket CDS using a 2-step tree.

Consider the following annual rating transition matrix: Row…

Consider the following annual rating transition matrix: Rows = initial rating Columns = rating at year-end Rating A Rating B Rating C Rating D Default Rating A ½  ¼  0 0 ¼  Rating B ½  ¼  ¼  0 0 Rating C 0 ¼  ½  ¼  0 Rating D 0  0 ¼  ½  ¼  Default 0 0 0 0 1 What is the expected time to reach default starting from bond with Rating C?  (Hint: Markov chain)