# CDS Price?!? BB27

I saw CDS price in the notes equal to the below in CFA text.

CDS price = (CDS Spread - Fixed Coupon) x EffSpread x Notional

Then the errata came out and they changed it to this (ended up being incorrect) and so I’m assuming the top equation is correct.

CDS price = 1 + [(CDS Spread - Fixed Coupon) x EffSpread]

Question 1: Does that mean upfront premium is equal to CDS Price? Exhibit 26, shows the same equation for upfront premium.

Next, if we look at BB example 27. If you look near the end of solution, the CFA text uses (the equation that is marked incorrect in the errata):

10 year CDS price per 100 = [1 + ((1 - 1.75%) x 8.68)] = 93.4
9 year CDS price per 100 = [1 + ((1 - 1.66%) x 7.91)] = 94.78

Question 2: I’m assuming this incorrect this uses the crossed equation (second equation I listed in the message).

Using the correct equations (i think the correct one – the top equation) CDS prices are:
10 year CDS price per 100 = [(1 - 1.75%) x 8.68)] = -6.51
and rolling forward one year.
9 year CDS per price 100 = [(1 - 1.66%) x 7.91)] = -5.22?

Question 3: Is negative CDS prices ok? That does not seem right.
Question 4: The CDS price is increasing. I read in an article that CDS prices increase when the probability of default increases. But here, the credit spread decreases and the CDS price increases. How can I understand this. Why the CDS price increases with declining spread?

S2000, I wrote a similar question in a thread that you replied to but the thread was not specifically related to this BB27. I think this will help many people because this is very, very confusing so I started a new thread. Thanks anybody who can shed light. I’m absolutely breaking my head.