Question
A company enters into a total return swap where it receives the return on a corporate bond paying a coupon of 5% and pays LIBOR.
A company enters into a total return swap where it receives the return on a corporate bond paying a coupon of 5% and pays LIBOR. Explain the difference between this and a regular swap where 5% is exchanged for LIBOR.
Assume that the default probability for a company in a year, conditional on no earlier defaults is x and the recovery rate is r The risk-free interest rate is 5% per annum. Default always occur half way through a year. The spread for a five-year plain vanilla CDS where payments are made annually is 120 basis points and the spread for a five-year binary CDS where payments are made annually is 160 basis points. Estimate x and r
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