Question: For the below of statement, state whether it is TRUE or FALSE and EXPLAIN the reason. Consider a credit index that comprises 125 reference entities.

For the below of statement, state whether it is TRUE or FALSE and EXPLAIN the reason.

Consider a credit index that comprises 125 reference entities. A trader buys the index at a spread of 200 bps payable semi-annually on a notional amount of $1 million. Assume one reference entity defaults. After default, the cash flows to the trader will be $9,920 received every 6 months.

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