8010 Exam Dumps | The CDS rate on a defaultable bond is approximated by which of the following expressions:

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Question 23/87

The CDS rate on a defaultable bond is approximated by which of the following expressions:

A. Hazard rate / (1 - Recovery rate)

B. Loss given default x Default hazard rate

C. Credit spread x Loss given default

D. Hazard rate x Recovery rate

Correct Answer: B

Explanation
The CDS rate is approximated by the [Loss given default x Default hazard rate]. Thus Choice 'b' is the correctanswer.
Note that this is also equal to the credit spread on the reference bond over the risk free rate. Therefore credit spreads and CDS rates are generally the same. Also, 'loss given default' is nothing but (1 - Recovery rate). This can besubstituted in the formula for the credit spread to get an alternative expression that directly refers to the recovery rate. Therefore all other choices are incorrect.

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