We want to compute the Credit Default Swap spread of a 5-year contract on some company for a notional of 1 million USD. After conducting a thorough fundamental analysis, we get the following numbers

Year Default Rate Recovery Rate LIBOR 1 4% 60% 55bps 2 3% 40% 60bps 3 2% 35% 67bps 4 2% 30% 77bps 5 1% 20% 90bps

The LIBOR rates on the table above are continuously compounded rates.

(a) What should be the spread of this contract? Assume that the premium payments occur only at the end of each year and that defaults can only happen half-way through the year. (b) What should the value of this contract be if the spread goes up by 1 basis point? This value is called the Spread Dollar Value of 1 basis point (SDV01 or CDS DV01) or the credit delta. (c) What should the value of this contract be if the LIBOR rate goes up by 1 basis point? This is known as the (interest rate) DV01.