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?

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 2 years ago

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