The ABC Bank Enters into a Credit Default Swap with XYZ

question 55

Multiple Choice

The ABC Bank enters into a credit default swap with XYZ Financial.The swap runs for 5 years and is based upon a term loan to LMN Corp.The size of the protection payment is 5% per year.Unfortunately,LMN goes bankrupt a year after this swap agreement becomes effective.Even with a 75% recovery value on the underlying loan,XYZ has paid ABC $20 million for settlements.How much has ABC lent to LMN?

• A)$100 million
• B)$80 million
• C)$50 million
• D)$20 million

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