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Test Bank: Chapter 23
Credit Derivatives
1. Suppose that the cumulative default probability for a company for years one, two, three
and four are 3%, 6.5%, 10%, and 14.5%.
(i) What is the unconditional default probability for year four _ _ _ _ _
(ii) What is the default probability for year four conditional on no default in earlier years
________
2. The number of companies underlying the CDX NA IG index is (Circle one)
(a) 50
(b) 75
(c) 100
(d) 125
3. The companies underlying the iTraxx index are (Circle one)
(a) Rated A or above
(b) Rated BBB or above
(c) Rated BB or below
(d) Rated BBB or below
4. In a CDS with a notional principal of $100 million the reference entity defaults. The
payoff to the buyer of protection when the recovery rate is 30% is (Circle one)
(a) $100 million
(b) $30 million
(c) $130 million
(d) $70 million
5. In a one-year forward contract on a CDS that will last five years, what happens if there is
a default during the first year? (Circle one)
(a) There is a payoff to the forward protection buyer at the time of default
(b) There is a payoff to the forward protection buyer at the end of one year
(c) There is a payoff to the forward protection buyer at the end of six years
(d) The contract ceases to exist
6. The recovery rate of a bond is normally defined as (Circle one)