2016-FRR Exam Dumps | Except for the credit quality of the Credit Default Swap protection seller, the following relationship

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GARP.2016-FRR.v2024-09-09.q145
Question 37

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Question 37/145

Except for the credit quality of the Credit Default Swap protection seller, the following relationship correctly approximates the yield on a risk-free instrument:

A. Bond + CDS

B. Bond + CDS + Market Spread

C. Bond - CDS

D. Bond - CDS - Market spread

Correct Answer: A

The relationship that approximates the yield on a risk-free instrument, excluding the credit quality of the Credit Default Swap (CDS) protection seller, is given by the combination of a bond and a CDS. The bond provides the base yield, and the CDS offers protection against default, together creating an instrument that mimics the characteristics of a risk-free yield by hedging against credit risk.
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