Explanation:
A credit default swap (CDS) provides protection against specific credit events (e.g., default, failure to pay, restructuring), not against market risk such as a decline in bond prices due to decreased demand. Since there is no credit event, the CDS is not triggered, and CFP does not receive any payout. CFP simply continues to pay the annual CDS premium, which is 300 basis points (3%) of the $10,000,000 par value, resulting in a payment of $300,000.
Ultimate access to all questions.
24.10.3. Chicago Firefighters Pension (CFP) owns Belize government bonds. The bonds have a $10,000,000 par value, and a credit default swap is available from Old Crow Bank for 300 basis points (3% of par value) for 10 years. In year 8, Belize bonds decrease to $8,000,000 value because of a decrease in demand for the bonds.
What will be the total payment in year 8?
A
CFP will receive a net payment of $1.7M.
B
CFP will receive a net payment of $2M.
C
CFP will pay $300,000.
D
CFP will receive a total payment of $2M.
No comments yet.