DEFAULTABLE FIXED COUPON BOND

PRICING
Assumptions

 The counterparty is the issuer and can default at τ.

 In case of default, the investor loses the fixed cashflows, but gets
the recovery on the bond which is a percentage of the nominal.

 The hazard function distributes as an exponential standard normal

variable and is independent of all default free market quantities.
Procedure

 Bootstrap the Discount curve from the OIS data

 Interpolation of the Credit curve

 Pricing of bond cashflows in case of no default

 Pricing of the payments received in case of default

 Sum of the two parts in order to find the net present value of the
defaultable bonds
DATA

 Survival probabilities: Credit Curve

Date NDP
1.2

20/12/2014 97,216%
1

20/12/2015 94,293%
0.8

0.6
20/12/2016 91,345%

0.4 20/12/2018 85,564%

0.2 20/12/2023 73,269%

0 20/12/2033 53,905%
1 30 59 88 117 146 175 204 233
DATA
Maturity (# months)
Discount Curve Market Quote
1 0,106%

1.1
OIS Products: 2 0,114%
1
3 0,115%
4 0,117%
0.9 5 0,119%
6 0,121%
0.8
7 0,122%
0.7
8 0,124%
9 0,128%
0.6 10 0,131%
11 0,135%
0.5
12 0,138%
0.4
15 0,152%
18 0,166%
0.3 21 0,184%
24 0,206%
0.2 36 0,344%
48 0,543%
0.1
1 2 3 4 5 6 7 8 9 10 11 12 13 6014 15 16 17 18 19 20 21 22 230,756%
24 25 26 27 28 29
Bonds data
Recovery
Nominal Start Date End Date Coupon Frequency Coupon
rate
4.972.284,02 01/03/2010 01/08/2021 3 3,500% 0,2
7.344.328,27 01/07/2009 01/07/2022 3 3,500% 0,2
7.172.290,19 01/01/2013 01/09/2017 6 2,000% 0,4
7.065.224,23 01/03/2010 01/10/2014 6 2,000% 0,4
5.256.452,14 01/07/2011 01/04/2016 6 2,000% 0,4
2.689.680,89 01/09/2009 01/07/2024 6 2,000% 0,6
3.593.518,71 01/07/2010 01/02/2019 12 2,000% 0,6
6.993.589,53 01/01/2011 01/11/2018 12 2,000% 0,6
6.684.377,52 01/09/2009 01/09/2021 12 2,000% 0,6
6.896.199,04 01/07/2010 01/11/2018 12 2,700% 0,4
2.587.984,60 01/10/2011 01/10/2020 12 2,000% 0,4
3.621.656,10 01/06/2012 01/07/2016 6 2,700% 0,4
3.146.567,47 01/06/2011 01/03/2022 6 1,800% 0,2
6.452.721,61 01/04/2009 01/04/2019 3 1,800% 0,2
3.418.346,24 01/05/2010 01/01/2016 3 1,800% 0,2
 Coupon Recovery
Nominal Start Date End Date Coupon NPV RF_NPV
RESULTS:
4,972,284.02 01/03/2010 01/08/2021
Frequency
3 3.500%
rate
0.2 2,288,383.27 2,469,627.73

7,344,328.27 01/07/2009 01/07/2022 3 3.500% 0.2 3,487,723.79 3,797,520.45

7,172,290.19 01/01/2013 01/09/2017 6 2.000% 0.4 4,034,957.46 4,146,758.31

7,065,224.23 01/03/2010 01/10/2014 6 2.000% 0.4 3,698,937.87 3,718,350.82

5,256,452.14 01/07/2011 01/04/2016 6 2.000% 0.4 2,864,785.17 2,910,979.70

2,689,680.89 01/09/2009 01/07/2024 6 2.000% 0.6 1,699,087.43 1,701,565.99

3,593,518.71 01/07/2010 01/02/2019 12 2.000% 0.6 3,631,389.18 3,863,881.93

6,993,589.53 01/01/2011 01/11/2018 12 2.000% 0.6 7,088,126.21 7,521,648.63

6,684,377.52 01/09/2009 01/09/2021 12 2.000% 0.6 6,525,977.23 7,118,369.34

6,896,199.04 01/07/2010 01/11/2018 12 2.700% 0.4 7,019,254.83 7,658,184.21

2,587,984.60 01/10/2011 01/10/2020 12 2.000% 0.4 2,470,640.55 2,777,846.90

3,621,656.10 01/06/2012 01/07/2016 6 2.700% 0.4 2,041,372.35 2,079,290.96

3,146,567.47 01/06/2011 01/03/2022 6 1.800% 0.2 1,629,149.29 1,862,858.79

6,452,721.61 01/04/2009 01/04/2019 3 1.800% 0.2 2,078,690.34 2,167,656.63

3,418,346.24 01/05/2010 01/01/2016 3 1.800% 0.2 989,082.64 1,004,081.63

 CDS Data
1.2

Now imagine that weCredit curve extracted from CDS mkt quotes
do not have the NDPs but we
1
have to extract them from CDS mkt quotes.
0.8
Maturity Quotes
12 1.260%
0.6 24 1.380%
36 1.420%
0.4 69 1.560%
120 1.760%
240 1.890%
0.2

So we bootstrap them and get the Credit Curve, that is, the set of NDPs which will be
0
33
13
17
21
25
29

37
41
45
49
53
57
61
65
69
73
77
81
85
89
93
97
1
5
9

109

185
101
105

113
117
121
125
129
133
137
141
145
149
153
157
161
165
169
173
177
181

189
193
197
201
205
209
213
217
221
225
229
233
237
241
used to discount the cashflows.
 Results using NDPs extracted from CDS
Nominal Start Date End Date Coupon Frequency Coupon Recovery rate NPV RF_NPV
4,972,284.02 01/03/2010 01/08/2021 3 3.500% 0.2 2,203,375.28 2,469,627.73

7,344,328.27 01/07/2009 01/07/2022 3 3.500% 0.2 3,345,719.06 3,797,520.45

7,172,290.19 01/01/2013 01/09/2017 6 2.000% 0.4 3,977,052.68 4,146,758.31

7,065,224.23 01/03/2010 01/10/2014 6 2.000% 0.4 3,683,247.78 3,718,350.82

5,256,452.14 01/07/2011 01/04/2016 6 2.000% 0.4 2,836,959.05 2,910,979.70

2,689,680.89 01/09/2009 01/07/2024 6 2.000% 0.6 1,709,894.47 1,701,565.99

3,593,518.71 01/07/2010 01/02/2019 12 2.000% 0.6 3,525,295.41 3,863,881.93

6,993,589.53 01/01/2011 01/11/2018 12 2.000% 0.6 6,887,967.34 7,521,648.63

6,684,377.52 01/09/2009 01/09/2021 12 2.000% 0.6 6,270,083.13 7,118,369.34

6,896,199.04 01/07/2010 01/11/2018 12 2.700% 0.4 6,724,157.77 7,658,184.21

2,587,984.60 01/10/2011 01/10/2020 12 2.000% 0.4 2,335,971.30 2,777,846.90

3,621,656.10 01/06/2012 01/07/2016 6 2.700% 0.4 2,019,035.24 2,079,290.96

3,146,567.47 01/06/2011 01/03/2022 6 1.800% 0.2 1,528,380.17 1,862,858.79

6,452,721.61 01/04/2009 01/04/2019 3 1.800% 0.2 2,035,355.95 2,167,656.63

3,418,346.24 01/05/2010 01/01/2016 3 1.800% 0.2 979,463.11 1,004,081.63

THANKS FOR YOUR ATTENTION

 Capuano Filomena

 Francesca Giulio

 Marcigliano Giuseppina

 Vellucci Antonio