If the CDS spread for a regular 5-year CDS is 120 basis points,what is the CDS spread for a 5-year binary CDS on the same underlying reference entity? Assume a recovery rate of 40%.
A) 48 basis points
B) 72 basis points
C) 200 basis points
D) 300 basis points

Question

Quizplus · Accepted Answer

The payoff from a regular CDS is (1-R)times the payoff from a binary CDS where R is the recovery rate.It follows that the CDS for a binary CDS is 120/(1-0.4)or 200 basis points

If the CDS Spread for a Regular 5-Year CDS Is