- CFA Exams
- CFA Level I Exam
- Study Session 13. Fixed Income (2)
- Reading 36. Credit Default Swaps
- Subject 3. Basics of valuation and pricing

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**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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