In your co-op term at CIBC, you are asked to evaluate a few CDS deals. The

contemplated CDS has a 5-year tenure and calls for annual payments to be made at

the end of each year. The reference identity's conditional probability of default during

a year conditional on no earlier default is 5.1%. The estimated recovery rate is 43%.

The LIBOR rate is 3.5%.

A)

Assume that when default occurs, it occurs in the middle of the year. Please calculate

the fair CDS spread. A 7-year CDS on the same reference identify was struck two

years ago (with CIBC being the protection seller, and CPPIB being the protection

buyer) had a contract spread of 325bp for a principal amount of $250 million. What is

the value of the CDS to CPPIB at this point?

B)

Assume that when default occurs, it occurs at the end of the year. Please calculate the

fair CDS spread.

C)

Compare the fair spreads from A) and B). Without doing calculations, please discuss

the size of the CDS spread if the swap payments are made at the beginning of each

year (for discussions here, assume defaults occur in the middle of the year).