Question

The yield on a company's five-year bonds is 4%. The five-year swap rate is 2.5%, and the five-year Treasury rate is 2%. What is the closest estimate of the five-year CDS spread?

a) 1.5%
b) 2.0%
c) 2.5%
d) 3.0%

Answer 1

The closest estimate of the five-year CDS spread is 1.5%.

Step-by-step explanation:

In order to estimate the five-year CDS spread, we need the difference between the yield on the company's bonds and the five-year swap rate. The yield on the company's five-year bonds is 4%, and the five-year swap rate is 2.5%. Therefore, the estimated five-year CDS spread is 4% - 2.5% = 1.5%.