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Bank A enters into a 5-year credit default swap with Bank B. The notional amount is $50 million based on a 5-year loan to Firm

Bank A enters into a 5-year credit default swap with Bank B. The notional amount is $50 million based on a 5-year loan to Firm C. Bank A pays a protection premium rate of 2.5% per year. After 1 year, firm C bankrupts and is able to provide $20.0 million to settle the debt with Bank A. What is the recovery ratio on this underlying loan?

a. 60%

b. 57.5%

c. 40%

d. 20%

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