CDS Valuation. A credit default swap on a $10,000,000, is a two-year agreement, whereby B (the protection buyer) agrees to pay S (the guarantor, or protection seller) a fixed annual fee in exchange for protection against default of two-year bonds XYZ. The payout will be N(100BT), where BT is the price of the bond at expiration, if the credit event occurs and N is the notional. Currently, XYZ bonds are rated A, have recovery rate of 45% and trade at 6.60%. The twoyear T-note trades at 6.00%. A simplified transition matrix is shown below. a. What is the average probability that XYZ bonds will default over a two-year period? % Round your answer to two decimals. b. What is the average annual expected loss using the actuarial method? $ Round your answer to the dollar