Assuming an investor holds a 3 year IBM bond it will give hi

Assuming an investor holds a 3 year IBM bond, it will give him a return very close to the return of the following position: 1) A 3-year IBM credit default swap on which he pays fixed and receives a payment in the 2) A 3-year IBM credit default swap on which he receives fixed and makes a payment in O 3) A three year US Treasury note plus a 3 year IBM credit default swap on which he pays event of default. the event of default. fixed and receives a payment in the event of default. 4) A five year US Treasury note plus a 3 year IBM credit default swap on which he receives fixed and makes a payment in the event of default. 5) None of the above

Solution

Ans option C

Risky corporate bond is equal to combination of Same maturity Treasury bind and CDS over that bond