Question

In: Finance

A. The CDS spread on Vox Corp is 350 basis points. What annual payment does a...

A. The CDS spread on Vox Corp is 350 basis points. What annual payment does a buyer of credit

protection have to pay to insure $5 million of Vox Corp bonds?

B. In the event of default, the recovery rate is 50%. If investors are risk-neutral, what is the probability of default per year implied by the spread?

Solutions

Expert Solution

A) Spread =3.5%
Annual payment = Spread * total value
=0.0350*5 mn
=$175,000

B)P=1-e^(-St/1-R)

R=0.50( Recovery rate)
S=0.035
Probability of default=1-e^(-0.035/0.5)=6.76%

jeff jeffy answered 1 year ago
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