What are the cash flows-cds agreement

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Suppose Bob holds a 10-year bond issued by company XYZ with a par value of $1,000 and a coupon interest amount of $100 each year. Fearful that XYZ will default on its bond obligations, Bob enters into a CDS with Steve and agrees to pay him income payments of $20 (similar to an insurance premium) each year commensurate with the annual interest payments on the bond. In return, Steve agrees to pay Bob the $1,000 par value of the bond in addition to any remaining interest on the bond ($100 multiplied by the number of years remaining). If XYZ goes under a day before the end of year 4 coupon payments, what are the cash flows to bob for years 0 through 4 from the cds agreement? To Steve? -Show cash flow time - -show all work

Reference no: EM13925015

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