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ABC Bank has a $10 million loan outstanding with DEF Inc. To reduce its default risk from this loan, ...

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ABC Bank has a $10 million loan outstanding with DEF Inc. To reduce its default risk from this loan, ...

ABC Bank has a $10 million loan outstanding with DEF Inc. To reduce its default risk from this loan, ABC enters a credit default swap of $10 million for 5 years with XYZ Insurance for a premium rate of 2.5% per year. If DEF can pay back only $6.5 million of its loan in 2 years’ time, what will be the net obligation for XYZ?

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$0.5 million

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$1.25 million

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$3.5 million

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$4.0 million

Textbook

Financial Management: Theory and Practice

Edition: 4^th

Authors: Brigham, Ehrhardt, Gessaroli, Nason

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Brilliant ツ

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