One year ago an investor purchased Bond 2, a $ 5 million three year senior unsecured bond issued by company Alpha. At the same time, she purchased a $5 million CDS, for which the reference obligation is Bond 1 issued by Alpha.

After one year, Alpha filed for bankruptcy. At that time its three series of bonds outstanding were the following.

Bond 1: five-year senior unsecured bond trading for 60% of par.

Bond 2: two-year senior unsecured bond trading for 25% of par.

Bond 3: five-year subordinated bond trading for 10% of par.

Which of the following is correct?

Group of answer choices

To receive the $5 million in credit protecion, the investor must return Bond 2 to the CDS seller.

None of the other answers are correct.

The investor would prefer a cash settlement on the credit protection because she can earn $7,500,000 on her position

The investor is indifferent between cash settlement and physical settlement of the CDS contract.

The investor would prefer a cash settlement on the credit protection because she can earn $6,750,000 on her position