2013 Garp practice exam question number 6

[saritay]

Hi David,

Lin Ping is valuing a 1 year CDS which pays the buyer 75%. PD is 5%. RF is 3%. Assuming defaults can only occur halfway through the year and that the accrued premium is paid immediately after default. What is the estimate.

1. 380bps
2. 385bps
3. 390 bps
4. 400 bps

Would you please explain the answer and the formula used.

Many thanks.
S

 

[David Harper CFA FRM]

Hi saritay, I moved this to the Credit Risk board (can i ask you not to just drop posts in the About FRM: we try to keep it clean for its purpose);
e.g., in this board the same question (source question, not your question) is found at http://forum.bionicturtle.com/threads/2013-garp-practice-exam-p2-question-6.7039
... I bookmarked your question, I am finishing forum support for today, soon, so i can focus on the formula sheets. I will get back to it when i can, thanks,

 

[saritay]

Many thanks. Noted. Will ensure proper place of posting next time.