1. An investor holds a portfolio of $10M of risky bonds on each of the following three companies.

Assume we know the recovery rate for each bond in advance.

a) Firm A with a recovery rate of 40%

b) Firm B with a recovery rate of 30%

c) Firm C with a recovery rate of 50%

2. If the investor uses CDS to protect the $30M investment, how much would the investor receive in each of the following scenarios?

i) Firm B defaults in a standard CDS

ii) Firm B defaults in a first-to-default basket

iii) Firm A defaults, followed by Firm B in a first-to-default basket

iv) Firm C defaults in a senior basket with a $5M first-loss limit

v) Firm A defaults in a senior basket with a $5M first-loss limit