An investor sold five-year protection on an investment-grade company and had to pay a 1.0% upfront premium to the buyer of protection. Given that the duration of the CDS was 4 years, the company’s credit spread was closest to:
- 0.25%
- 0.75%
- 1.25%
Answer: B
( 52-7)
, Wiley. Practice Questions for 2015 Level II CFA Exam. John Wiley & Sons P&T, 08/2014. VitalBook file.
How do we know the answer is B? Couldn’t it also be C, if the coupon rate were 1%? And if an investor is selling 5 year protection doesn’t the CDS have to be 5 years in duration initially?