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Question 14.6: A firm has a bond in issue that has a Standard and Poor’s cr...

A firm has a bond in issue that has a Standard and Poor’s credit rating of BBB. The projected values of the bond, allowing for changes in gross redemption yield and, when relevant, default and recovery, are given below for each credit rating. Using a credit migration approach based on Standard and Poor’s migration rates from 1981 to 2009, what are the expected value and variance of the value of the bond?

Year-end rating Value given  rating
AAA 104.27
AA 103.18
A 102.10
BBB 100.00
BB 94.98
B 90.29
CCC-C 81.78
Default 61.97
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