Question

If the portfolio described in #2 has a contractual coupon rate of 6.2%/year, what is its expected annual yield? (Your answer should be a % carried to 2 places.)

Question #2 (needed to answer question above):

1. Morgan Stanley manages a well-diversified, speculative grade bond portfolio which is expected to have an annual default rate of 4.2% and loss given default of 60%. What is the portfolio’s expected loss over the next 12 months? (Your answer should be a % carried to 2 places.) 4.2% x 60%= 2.52% for expected loss

Answer 1

As given in question 2, we have the following information available:

1. Default Rate                                                       (A)         4.2%
2. Loss given default (B)          60%
3. Expected loss on portfolio           (A*B) (C )         2.52%

Considering the Portfolio value as $100 and the expected Loss is 2.52% of the portfolio, the net assets value will be

$ 100-$2.52= 97.48

Since the contractual coupon rate is 6.2% on the original value of $100, expected annual yield would be

6.2/97.48*100= 6.36%

The annual yield in this case is 6.36%