If an investor holds a 5 US Treasury note it will give him a

If an investor holds a 5 US Treasury note, it will give him a return very close to the return of the following position: )A5-year IBM credit default swap on which he pays fixed and receives a payment in the event of default. 2) A 5-year IBM credit default swap on which he receives fixed and makes a payment in the event of default. 3) A10- year IBM note plus a 5- year IBM credit default swap on which he pays fixed and receives a payment in the event of default. ?? 4) A 5-year IBM note plus a 5year IBM credit default swap on which he receives fixed and makes a payment in the event of default 5) None of the above.

Solution

Ans option D

A risky corporate bond can be replicated by same maturity T note plus CDS over the same company