Sales & Trading Interview Questions
Can someone please provide answers to the following questions:
1. If I have two bonds, one pays $0.40 on default the other pays $.20 and they are trading at equal CDS spread, which has a higher implied default probability?
2. I buy a 7 year par bond paying 8% annual. What is the YTM? If I wait 1 year and sell it at a YTM of 7%, how much money do I have?
3. I have a 10 year 6% bond. What is the maximum price this bond could ever reach? Why?
4. If interest rates drop 20 basis points, how much does a zero coupon 2yr bond's price increase/decrease?





Comments
1. The 0.4 dollar has a high
1. The 0.4 dollar has a high probability of default
2. Just use the annuity formula to value the bond as if it were a 6 year bond with a coupon of 8% with a discount of 7% - the YTM will be more than if you waited to maturity and sold.
3. Well if Par is 100. Then the maximum price it can reach is 100 + (6*10) = 160. That's in the case where interest rates are 0, and so the coupon payments are as is stated before.
4. This is simply the duration formula. The duration of a 2 year zero coupon bond is 2, and so you can use that to figure out the price drop/rise.