Question: Verify that if the CDS spread for the example in Tables 24.1 to 24.4 (Lecture 6 - Textbook 1) is 100 basis points and the

Verify that if the CDS spread for the example in Tables 24.1 to 24.4 (Lecture 6 - Textbook 1) is 100 basis points and the probability of default in a year (conditional on no earlier default) must be 1.61%. How does the probability of default change when the recovery rate is 20% instead of 40%? Verify that your answer is consistent with the implied probability of default being approximately proportional to 1/ (1 R) where R is the recovery rate.

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