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The survival probabilities and unconditional default probabilities for Bote Corp are listed in the table below. Baltimore Bay Investments has entered into a 4-year credit default swap (CDS) with Phili Investments to hedge against the credit risk of a $50 million bond issued by Bote Corp. Assume that payments on the CDS occur annually at the end of the year, and that defaults on the CDS occur halfway through each year. The risk-free rate is 6 percent, compounded continuously, and the recovery rate in the event that Bote Corp defaults is 40%. The probability that Bote Corp defaults during a year, conditional on no-earlier default is 2 percent.
Which of the following is closest to the present value of the total expected payments made by the buyer of the CDS? A. 3.28s. B. 3.98s. C. 5.61s. D. 3.32s. |