Present value of the expected premiums from the CDS

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Reference no: EM131917870

1. Suppose that an investor owns a pass-through in which the remaining mortgage balances at the beginning of some month is $100 million. Assuming that the SMM is 0.69244% and the scheduled principal payment is $1 million, the estimated prepayment for the month is:

$685,515.60

$616,270.05

$692,440.00

$68.551,560.00

Consider the following 2-year Credit Default Swap:

The probability of a default during any given year (conditional on no default during previous years) is 3%, so CDP = 3%.

The risk-free rate (LIBOR) is 5% per year

The recovery rate is R = 30%

The CDS buyer gets 70% of face value if a default occurs

What is the present value of the expected premiums from the CDS?

0.9700s

0.9409s

1.777s

1.911s

2. Using the information from the previous question, find the present value of the expected payoffs

0.0210

0.0204

0.0414

None of the above

Reference no: EM131917870

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