ABC Bank enters a credit default swap of $10 million for 5 years with XYZ Insurance.How much does ABC have to pay with a premium rate of 2.5% per year?

Question

Quizplus · Accepted Answer

The premium payment for the credit default swap is calculated as follows:
Premium payment = Notional amount * Premium rate * Number of years
= $10 million * 2.5% * 5
= $2.5 million
However, this premium payment is paid annually, so the annual premium payment would be $2.5 million / 5 = $500,000. Therefore, over 5 years, ABC would have to pay a total premium of $500,000 * 5 = $2.5 million or $250,000 annually. Hence, the best choice is C.

ABC Bank Enters a Credit Default Swap of $10 Million