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Quantitative Finance by Matt Davison

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Chapter 6

Bond Pricing with Default

Using Simulations

6.1 CHAPTER SUMMARY

This chapter works in parallel with Chapter 7, and is designed to be read somewhat independently. In 2008 the world’s financial system was brought to the brink of collapse by problems arising in the market for derivative financial securities known as Collateralized Debt Obligations. As of the summer of 2010 and 2011, world market worries changed their focus to default risk in government bonds. In this chapter we will make simple mathematical models of debt securities, and their portfolios using basic Excel spreadsheets. We will use these spreadsheets to simulate the risk-return properties of these loans and portfolios. This same topic will be taken up later in the book ...

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