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The CDS quote for the bonds of Bank X is 200 bps. Assuming a recovery rate of 40%, calculate the default hazard rate priced in the CDS quote.
Suggested Answer: C
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Hazard rate x Loss given default = CDS quote. In other words, Hazard rate x (1 - recovery rate) = CDS quote. We can therefore calculate the hazard rate for this problem as 200 bps/(1 - 40%) = 3.33%.
31 comments · newest first
CA
Catarina
20 days ago
I agree with C too. The math makes sense with the given numbers.
BE
Bettina
25 days ago
I feel like B, 5.00% is too high. The recovery rate should lower it.
PH
Phil
1 month ago
I’m leaning towards option C, 3.33%. It seems reasonable with the recovery rate.
GL
Gladis
1 month ago
This question is tricky! I think it’s about understanding the recovery rate.
BE
Ben
1 month ago
I agree with C too! The math checks out for the default hazard rate.
FR
Francisca
2 months ago
I’m leaning towards option C, 3.33%. It seems reasonable with the recovery rate.
GL
Glory
2 months ago
I feel like it's a bit straightforward if you know the formula.
TR
Trinidad
2 months ago
This question is tricky! I think it's about understanding the CDS pricing.
JU
Julie
2 months ago
I’m not so sure. I might go with option D, 2.00%. It feels safer to me.
LO
Loren
2 months ago
I agree with Nakita. 3.33% seems reasonable given the recovery rate.
NA
Nakita
2 months ago
Yeah, I feel like the recovery rate plays a big role here. I'm leaning towards option C.
KI
Kiera
3 months ago
This question is tricky! I think it's about understanding the relationship between CDS and default rates.
GE
Gerald
3 months ago
I thought it would be lower, but D makes sense.
GE
German
3 months ago
5.00% seems way too high for a recovery rate of 40%.
CA
Carmen
3 months ago
Wait, how do you even calculate that?
JO
Jolanda
3 months ago
Definitely going with option D, seems right!
AZ
Azzie
3 months ago
The CDS quote is 200 bps, that's 2.00%.
LE
Leonie
4 months ago
I agree with D, but I'm surprised it's not higher given the risk!
NO
Nohemi
4 months ago
Recovery rate of 40% makes sense, but I’m leaning towards 3.33%.
AD
Adelle
5 months ago
Wait, how did you get 2.00%? That seems low for a bank!
BR
Brianne
5 months ago
I think it's definitely option D, seems right.
DU
Dulce
6 months ago
The CDS quote is 200 bps, that's 2.00%.
PU
Pura
6 months ago
Recovery rate of 40%? That seems low for a bank.
LU
Luke
6 months ago
Definitely going with option D, 2.00%.
MI
Mitsue
6 months ago
Wait, how do you get 5.00% from that? Seems off.
GA
Gail
6 months ago
I think it's actually 3.33%.
TR
Truman
6 months ago
The CDS quote is 200 bps, that's 2.00%.
ZO
Zoila
7 months ago
I feel like the answer is around 2% based on what we practiced, but I can't quite remember how to derive it from the CDS spread.
AR
Arlette
7 months ago
I recall a similar question where we had to calculate the hazard rate, and I think it involved some logarithmic functions. I hope I remember the right steps!
BA
Bambi
7 months ago
I'm a bit unsure about the recovery rate's impact on the hazard rate. Does it directly affect the calculation, or is it just a factor we adjust for?
TA
Tamar
7 months ago
I think we need to use the formula that relates the CDS spread to the default probability and recovery rate. I remember something about that from practice questions.