Estimate the credit default swap spread

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Reference no: EM131240275

What is the value of the swap in Problem per dollar of notional principal to the protection buyer if the credit default swap spread is 150 basis points?

Problem :

Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5-year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default is 3%. Estimate the credit default swap spread. Assume payments are made annually.

Reference no: EM131240275

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