On 1 January 20X2, Deem Advisors purchased a $10 million six-year senior unsecured bond issued by UNAB Corporation. Six months later (1 July 20X2), concerned about the portfolio's credit exposure to UNAB, Dorris Morrison, the chief investment officer at Deem Advisors, purchases a $10 million CDS with A a standardized coupon rate of 5%. The reference obligation of the CDS is the UNAB bond owned by Deem Advisors.

On 1 January 20X3, Morrison asks you, a derivatives analyst, to assess the current credit quality of UNAB bonds and the value of Deem Advisor's CDS on UNAB debt. Watt gathers the following information on UNAB's debt issues currently trading in the market:

• Bond 1: A two-year senior unsecured bond trading at 40% of par Bond 2: A six-year senior unsecured bond trading at 50% of part Bond 3: A six-year subordinated unsecured bond trading at 20% of par

Concerning the credit quality of UNAB, Watt makes the following statement: "There is severe near-term stress in the financial markets, and UNAB's credit quality reflects the difficult environment."

On 1 July 20X3, Morrison asks you to explain under what conditions that UNAB experiences a credit event, and if the event happens, to recommend a settlement preference. Required: a. Define a credit event and discuss different types of credit events. (8 marks) b. Recommend a settlement preference if UNAB experienced a credit event on 1 July 20X3. (8 marks)