There are two series of outstanding senior bonds issued by a company, which has filed for bankruptcy. Bond A trades at 20% of par, and Bond B trades at 30% of par. Investor X owns $10 million of bond A and investor Y owns $10 million of bond B. They both own $10 million of CDS protection.

What is the recovery rate for the CDS contract of X's?

A. 20%.
B. 25%.
C. 30%.

Correct Answer: A

The cheapest-to-deliver obligation is Bond A. Recovery rate for both CDS contracts is 20%.