Suppose that the risk-free zero coupon curve is flat at 3.0% per annum with continuous compounding and that defaults can occur half way through each year in a new four-year credit default swap. You have estimated that the expected recovery rate is 26% and the hazard rate () is 2.4%. Assume that the CDS payments will be made annually in arrears.

(a) Estimate the credit default swap spread using the equation (t) = s(T)/(1-R)

(b) Calculate the credit default swap spread using the available information to model the cash flows of the CDS. Use the equation: V(t) = e^t to determine the likelihood of survival at each potential default time.

(c) How do your two answers differ? Why?