Credit Spreads & CDS Basics: Hazard Rates, Spreads & Default Probabilities

What you'll build

What you will be able to do

Each lab ends with a concrete result that you build yourself and the checker confirms, cell by cell.

• Measure six fictional bonds' spreads over Treasuries in basis points, average the BBB names and price Halvard Industries' 3-year bond with a Z-spread on top of the spot curve.
• Turn six fictional CDS spreads into the default probabilities the market implies, go the other way from a PD estimate to a fair spread and chart the implied PDs.
• Derive Halvard Industries' hazard rate from its CDS spread and build the survival curve, the cumulative default probability and the default probability of each year over five years.
• Value the premium leg of a 3-year, USD 10 million CDS on Halvard Industries: quarterly survival probabilities, the risky annuity (RPV01) and the present value of the premiums.
• Value the protection leg of the same Halvard CDS: the probability of default in each quarter, the discounted payout (1 − R) × notional and the total protection leg PV.
• Calculate the fair spread of the Halvard 3-year CDS, the fair spreads of a whole maturity curve, the upfront payment on a standard 100 bp coupon and the hazard rate the 5-year spread implies.
• Value Halvard protection bought at 180 bp a year ago under seven spread scenarios, for the buyer and the seller, and chart the MTM profile against the spread.
• Compare six fictional issuers' bond Z-spreads with their CDS spreads, label each basis as positive or negative, count the negative ones and size the yearly carry of a negative-basis trade.