Which of the following statements best describes how a single-name CDS contract is priced at inception? A.
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Which of the following statements best describes how a single-name CDS contract is priced at inception?
A. If the reference entity’s credit spread trades below the standard coupon rate, the CDS contract will be priced at a premium above par because the protection buyer pays a “below market” periodic coupon.
B. If the reference entity’s credit spread trades above the standard coupon rate, the CDS contract will be priced at a discount to par because the protection seller effectively receives a “below market” periodic premium.
C. Similar to fixed-rate bonds, CDS contracts are initially priced at par with a fixed coupon and a price that changes over time as the reference entity’s credit spreads change.
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