The Fair Price of a CDS Contract on a Reference

question 12

Multiple Choice

The fair price of a CDS contract on a reference bond is equivalent to that of a spread on a floating-rate bond issued by the same entity as the reference bond and that

• A) Is trading at par.
• B) Has the same maturity as the CDS.
• C) Has the same seniority as the reference bond underlying the CDS.
• D) Has all three properties listed above.

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Definitions:

Compounded Semi-annually

Interest calculation method where the interest is added to the principal twice a year, leading to a growth in the amount at a faster rate than simple interest.

Compounded Quarterly

This term refers to the calculation and addition of interest to the principal sum of a deposit or loan on a quarterly basis.

RRSP

A Canadian retirement savings plan that defers taxes on contributions and investment earnings until withdrawal.

Compounded Quarterly

An approach to interest calculation that involves adding the interest to the principal sum every three months.