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Hi, I don't understand the way Malz states the future value of the debt; it seems counter-intuitive and contrary to what I read in de Sevigny and Stulz. We know the Value of the debt can be modeled as a simultaneous position in a risk-less bond with face value of the risky debt discounted using...

@sneakyplacebo , I'm also a bit confused about CDS compression. The below description from ISDA along with ShatkiRathore's examples have helped me out (emphasis is mine) Not sure how this has an effect on the level of counterparty risk though.

Hi, what makes a model (ie: credit risk +) portfolio based ? What are the alternatives to portfolio based ?

Hi, Can you expand a bit further on these relationships laid out in the notes on Stulz ? Thanks Increase in the positive correlation between firm value and interest rate shocks (what shocks ?) causes a decrease in debt value. Increase in rate volatility and decimal level of interest rates...

Thanks David, I understand it now. Much appreciated.

Thanks for the detailed answer David. So when investors are risk neutral, risk neutral probabilities = real world probabilities and they only differ if the investor is risk averse? I'm having difficulty understanding why, in general, real world probabilities are 50/50 but in a risk neutral...

Thanks for the detailed reply; makes sense now. One more quick question, what does Tuckman mean by a "factor structure"; from the context I'm assuming he's talking about the term structure of rates. Am I correct ?

Hi, I'm having trouble understanding the arguments against time dependent volatility models to value and hedge fixed income instruments. Tuckman says: "The downward-sloping factor structure and term structure of volatility in mean reverting models capture the behavior of interest rate...

I'm having trouble with the Ho-Lee model for short rates and differentiating between how to find the values for the free parameter λ versus using the model to predict future rates. The Ho-Lee model for each step in a binomial tree: λtdt+σ sqrt(dt) I've read that to set the free parameter at...

Thanks.

Hi, In Tuckman chapter 8 (risk premium subsection) he calculates the price of a two year zero using the up and down probabilities of 50% and says this is how the zero would be priced by risk neutral investors. Are these not the real world probabilities? Thanks

@ami44 thanks very much.

Hi @ami44, I must have missed that. Needed more PCs to explain the the variance of the very short term makes sense. Thanks so much.

Maybe I'm not seeing the forest for the trees, it's been an arduous day of studying, but the above solution says to solve for the unknown face value of the 2 year I need to know the unknown face value of the 10 year ... + F10 * DV01_10 * PC1_10Year... What am I missing ? Thanks for your time.

Hi @ami44 , Thanks for you reply, though I still can't see how to solve for both the 2 year face value and 10 year face value; the equations you listed each have two unknowns.

Hi, Can you breakdown how Tuckman arrives at the required face values of the 2 and 10 year swap rates to hedge the 5 year swap rate ? Thanks He sets out the hedge like so: -Face-2year*(DV01-2year/100)*Change_in_2year - Face-10year*(DV01-10year/100) * Change_in_10year - Face-5year...

Hi, Tuckman chapter 6 says the data in table 6.5 implies "hedging one short term bond with another will not be so effective as hedging one long term bond with another" Can you clarify this? I can see from the data in table 6.5 that a 1 standard deviation increase in all rates in the term...

Thanks @ShaktiRathore . So the return of the equity tranche tanked against the risk free rate?

Hi @David Harper CFA FRM CIPM , To me it sounds like these two statements are contrary: "The longer the maturity (T), the more discounting, and so the "further away" your principal, the more sensitive is the price to changes in rate (r)." And "is because (similar to discounting above), an...