MGM 675 par bond is rated AA with maturity of 5 years A deal

MGM 6.75% par bond is rated AA with maturity of 5 years. A dealer has quoted a 5 year credit default swap on this bond at 115/140. XYZ has $10 million U.S Treasury bond with a yield of 4.5 percent and wishes to replicate MGM bond by selling 5 year protection on MGM. XYZ is expected to earn yield o

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Solution

4) None of the above

The current yield of MGM bond is 6.75% and a dealer has quoted a 5 year credit default swap on this bond at 115/140. Therefore, Expected yield is as follows.

yield = 6.75%*115/140

= 5.54%

Thus, the answer is None of the above.