I understand that the fixed coupon paid periodically by the protection buyer is standardised to 1% for investment-grade (IG) issuers and 5% for high-yield (HY) issuers.
Maybe it’s a stupid question but anyone can tell me whether this is annualised rate?
I have this doubt because of an example question from Schweser Notes Module Quiz 14.5
"An active credit manager decides to overweight exposure to an investment-grade company using $10 million notional of CDS contracts with tenor of 5 years, a CDS spread of 150 basis points, and a spread duration of 4.5. Three months later, the CDS spread is 120 basis points and the spread duration is 4.25. The profit from the CDS trade is to:
A. $100,000. B. $140,000. C. $240,000."
I thought the fixed coupon rate 1% is annual so the coupon income = 0.01 × $10,000,000 × 3/12 = $25,000. In the answer, coupon income during the three months = 0.01 × $10,000,000 = $100,000.
Could someone help me?