ABC PLC is entering a four-year single name credit default swap with credit performance of DEF PLC as its underlying. The annual probability of default for DEF PLC is assessed at 2.24% and the recovery rate is estimated at 40%.

Question 31: Assuming all defaults occur mid-year and the annual cost of finance for ABC PLC is 6.72%, calculate the equilibrium swap rate for the credit default swap

a) 94bps b) 142bps c) 140bps d) 91bps e) 136bps

Question 32: Identify the present value of the net payoff for the protection seller in the swap if the par value is $100,000, the swap rate is 155bps, and DEF PLC defaults in the second year of the swap

a) -$52381.04 b) -$52970.61 c) -$59070.00 d) -$60000.00 e) -$52267.64

Question 33: Identify the expected net payoff for the protection buyer in the swap if the par value is $100,000 and the swap rate is 155bps

a) -$2578.26 b) $729.58 c) -$2006.27 d) $418.87 e) -$478.09

Question 34: Identify the equilibrium swap rate if the recovery rate increases to 60%

a) 94bps b) 142bps c) 140bps d) 91bps e) 136bps

Question 35: Identify the equilibrium swap rate if defaults are assumed to occur at the start of the year instead of mid-year

a) 145bps b) 134bps c) 137bps d) 147bps e) 142bps

Question 36: If the swap rate for the credit default swap is 167bps, calculate the implied annual probability of default for DEF PLC

a) 2.62% b) 2.66% c) 2.56% d) 1.60% e) 3.96%