In a CDS contract that will last five years, what happens if there is a default during the first year?

Select one:

a. There is an accrual payment to the CDS seller

b. There is a payoff to the CDS buyer (from the seller) and an accrual payment to the CDS seller (from the buyer)

c. The contract ceases to exist without any payment

d. There is a payoff to the CDS buyer

Solutions

Expert Solution

In a CDS, the buyer of the swap makes payments to the swap's seller until the maturity date of a contract. In return, the seller agrees that – in the event that the debt issuer(borrower) defaults or experiences another credit event – the seller will pay the buyer the security's value as well as all interest payments that would have been paid between that time and the security's maturity date.

In a CDS contract that will last five years, if there is a default during the first year ,then there is a payoff to the CDS buyer.

Therefore , the correct option is Option-d. There is a payoff to the CDS buyer

jeff jeffy answered 2 years ago

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