FRM Part II · FRM Exam Part II · Credit Derivatives
A bank buys 5-year CDS protection on a corporate bond with a notional of USD 20 million. The CDS spread is 150 basis points per year, paid quarterly. Ignoring accrual and discounting, what is the approximate quarterly premium the bank pays?
The quarterly premium is about USD 75,000. The annual premium is notional times spread, USD 20 million times 1.5 percent, or USD 300,000, and dividing by four quarterly payments gives USD 75,000. The USD 300,000 figure is the annual payment.
- AUSD 75,000Correct
- BUSD 300,000
- CUSD 30,000
- DUSD 150,000
Explanation
Annual premium = 20,000,000 x 0.0150 = USD 300,000. Paid quarterly, this is 300,000 / 4 = USD 75,000. USD 300,000 is the annual amount, not the quarterly one.
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