Question: Problem 3 Suppose that the risk-free zero curve is flat at 3% per annum with continuous compounding and that defaults can occur half way through

Problem 3 Suppose that the risk-free zero curve is flat at

Problem 3 Suppose that the risk-free zero curve is flat at 3% per annum with continuous compounding and that defaults can occur half way through each year in a new five-year credit default swap. Suppose that the recovery rate is 40% and the default intensity is 2.5% per year. Estimate the five-year credit default swap spread. Assume payments are made annually. Problem 3 Suppose that the risk-free zero curve is flat at 3% per annum with continuous compounding and that defaults can occur half way through each year in a new five-year credit default swap. Suppose that the recovery rate is 40% and the default intensity is 2.5% per year. Estimate the five-year credit default swap spread. Assume payments are made annually

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