ABC Inc Has a Risk-Neutral Probability of Default of 5% Over

question 5

Multiple Choice

ABC Inc. has a risk-neutral probability of default of 5% over every half-year period. The loss-given-default (LGD) is 75% of the face value of the debt in ABC Inc. If the risk-free interest rate for one year is 10% on a semiannual compounding basis, find the fair spread for a one-year maturity, semiannual pay CDS contract. Assume that the spread is paid at the beginning of each half-year, while default, if it occurs, occurs at the end of each semiannual period.

• A) 228 bps
• B) 357 bps
• C) 428 bps
• D) 551 bps

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Definitions:

Expectancy Theory

A motivation theory that suggests an individual's motivation is influenced by their expectation that their effort will lead to desired performance and that performance will lead to a desired reward.

First Level Outcome

The immediate results or effects that are directly attributable to a specific action or intervention.

Distal Goals

Long-term objectives that are often more abstract and challenging to measure, serving as the ultimate targets in planning.

Frequent Feedback

Regular and consistent feedback provided to individuals to inform them of their performance and areas for improvement.