An analyst has gathered the following information about ABC Inc. and DEF Inc.The respective credit ratings are AA and BBB with l-year CDS spreads of200 and 300 basis points each. The associated probabilities of default based on published reports are 10% and 20%, respectively. Which ofthe following statements about the recovery rates is most likely correct?
　　A. The market implied recovery rates are equal.
　　B. The market implied recovery rates is higher for ABC.
　　C. The market implied recovery rates is lower for ABC.
　　D. The loss given default is higher for DEF.
　　Answer:C
　　The approximation of credit spread = (1 - RR) X (PD). This implies:
　　ABC: 200 bps=(I-RR)X(10%), so RR= 80%.
　　DEF: 300 bps = (1 - RR) X (20%), so RR = 85%.
　　Thus, the market implied recovery rate is lower for ABC. Using loss given default terminology,
　　LGD for ABC = 20% and LGD for DEF = 15%.