CDS Valuation Slides

[ATSEN4075]

I'm not sure if this is the place to ask this question related to the slide Chapter 25 Credit Derivatives page 11 example.
* May I know where is the accural payment numbers come from?
* Shouldn't the CDS premium stops after the first default happens? In this case, it should only pay premium incurred for the first 0.5 year.

Please link the relevant thread if this example has been discussed by other members. Appreciate in advance.

 

[Clay Carter]

I'm not sure if this is the place to ask this question related to the slide Chapter 25 Credit Derivatives page 11 example.
* May I know where is the accural payment numbers come from?
* Shouldn't the CDS premium stops after the first default happens? In this case, it should only pay premium incurred for the first 0.5 year.

Please link the relevant thread if this example has been discussed by other members. Appreciate in advance.

@ATSEN4075
The “Expected Accrual Payment” values come from the assumption that defaults occur halfway through each year. Since CDS premiums are paid periodically, the buyer owes the seller only the portion of the year that has passed before a default. On average, this is assumed to be half a year, so the expected accrual payment equals half of the probability of default for that period. That’s why, for example, when the probability of default is 0.0488 in the first half-year, the expected accrual payment is simply 0.5 × 0.0488 = 0.0244.

You’re also right that once a default occurs, the CDS premium payments stop, there are no more premiums after the protection seller compensates the buyer for the loss. The table, however, doesn’t represent an actual payment timeline; it reflects expected values across different possible default scenarios. Each row corresponds to a potential default time (e.g., after 0.5 years, 1.5 years, etc.) weighted by its probability. When we add these up, we’re calculating the expected present value of payments over all possible paths, not assuming multiple defaults. This expected-value approach is how the CDS spread is determined mathematically, even though in reality, the contract terminates after a single default event.

Hope this helps,
CC