wanganjie

 

The correct answer is C

Equate the present value of total payments to the present value of the expected payoff in the event of default.

3.3199s = .0415, s = .0125, or 125 basis points.

wanganjie

 

The correct answer is D

The total value of expected payments made by the buyer of the CDS includes both the payments based on the spread and the expected accrual payment. Both are shown in the tables below.

PV of expected payments:

Time (Years)	Survival Probability	Expected Payment	PV of Expected Payment
1	0.9800	0.9800s	0.9229s
2	0.9604	0.9604s	0.8518s
3	0.9412	0.9412s	0.7861s
4	0.9224	0.9224s	0.7256s
		TOTAL	3.2864s

PV of the accrual payments in the event of default:

Time (Years)	Probability of Default	Expected Accrual Payment	PV of Expected Accrual Payment
0.5000	0.0200	0.0100s	0.0094s
1.5000	0.0196	0.0098s	0.0087s
2.5000	0.0192	0.0096s	0.0080s
3.5000	0.0188	0.0094s	0.0074s
		TOTAL	0.0335s

Present value of total expected payments = 3.2864s + .0335s = 3.3199s