The payments on a 4-year credit default swap (CDS) are made at the rate of s per
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The payments on a 4-year credit default swap (CDS) are made at the rate of s per year on a notional principal of $1. The hazard rate of the underlying reference entity is 1.2% per annum, the annual risk-free interest rate is 4% (continuously compounded), and the recovery rate is 40%. What is the CDS spread s? Defaults always happen halfway through a year and payments on this CDS are made once per year, at the end of each year.
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