Consider a Two-Year, Annual Pay CDS Contract, Where Premiums Are

Multiple Choice

Consider a two-year, annual pay CDS contract, where premiums are paid at the end of the year and if default occurs, it is also assumed to happen at the end of the year (but immediately after the premium payment) . Each year there is a 5% risk-neutral probability of the firm defaulting. In default, recovery is 50% (recovery of par, RP) . Assume that interest rates are zero. The fair price of this CDS is a spread of

A) 200 bps
B) 225 bps
C) 250 bps
D) 275 bps