Question

Part 1

Consider the following 1-year Credit Default Swap:

The probability of a default during any given year (conditional on no default during previous years) is 3%, so the CDP = 3%.

The risk-free rate (LIBOR) is 5% per year

The recovery rate is R = 30%

CDS buyer gets 70% of face value if a default occurs.

What is the present value of the expected premium from this CDS?

A) .9700s

B) .9509s

C) .9238s

D) none

Part 2

Referring to this question above. What is the present value of the expected payout from this CDS?

A) .0300

B) .0185

C) .0200

D) none