The ABC Bank Enters into a Credit Default Swap with XYZ

question 1

Multiple Choice

The ABC Bank enters into a credit default swap with XYZ Financial.The notional amount of the swap is $50 million.The 5-year swap is based upon a 5-year loan to LMN Corp.The size of the protection payment is 3% per year.As LMN bankrupts during the time this swap is still valid,XYZ has paid ABC $22.5 million for settlements.What is the recovery ratio on the underlying loan?

• A)60%
• B)55%
• C)45%
• D)40%

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