If defaults are expected to occur mid-year, the time period for discounting expected payments to their present value would be half a year less compared to a default at the end of the year. As a result, the discount factor $e^{-0.03 \times t}$ would be greater for a shorter discounting period $t$, thereby making the present value of the expected payoff higher due to less discounting.

B is incorrect. A longer discounting period would decrease, not increase, the present value.
C is incorrect. The timing of default has a direct effect on the present value due to the discounting of cash flows.
D is incorrect. The effect on the present value can be determined with the given default timing and risk-free rate.

Things to Remember.

• The assumed timing of default events within the tenure of a CDS influences the present value of expected payoffs due to changes in the discounting period.
• Mid-year defaults equate to less discounting time, which increases the present value compared to year-end defaults.

For valuing CDS contracts, it is important to make explicit assumptions about the timing of potential default events