Credit rating agency to lower the rating of the bonds

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A financial institution buys a $1 million bond issued by a large manufacturing company. The financial institution wants to protect itself from credit risk and pays a counterparty $1,000 annually in return for a promise from the counterparty to pay the financial institution the cash value of the loss from the credit event. As it turns out, trouble in the manufacturing industry causes a credit rating agency to lower the rating of the bonds after two years. As a result, the market value of the bonds falls by $12,000, and the financial institution decides to exercise its CDS on the bonds. In this case, how much is the the notional principal, or notional amount, of the derivative contract?

Reference no: EM133114739

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