- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 32. Credit Default Swaps
- Subject 3. Basics of Valuation and Pricing
CFA Practice Question
Assume a hazard rate of 3% for the first interest payment of $50 (year 1), and a hazard rate of 5% for the second and final interest and principal payment of $1050 (year 2). The recovery rate is 40%.
What is the probability of default occurring at some time in the life of the debt?
A. 7.85%
B. 8%
C. 8.15%
Explanation: Probability of no default: 97% x 95% = 92.15%.
100 - 92.15% = 7.85%.
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