CDS settlement

CFA Level II Fixed Income
#1

Hi to everybody,

I have hard time to understand the way we choose the right obligation for settlement of cds. Here is an example:

« The portfolio currently has $10 million par value of 6% 10-year senior unsecured IDG Corp. bonds. IDG declares bankruptcy.

Market Price of IDG Bonds Post Bankruptcy Filing

Description

Market Price (%) of Par

9.5-year 6% senior unsecured

45% of par

5-year 5% senior unsecured

40% of par

5-year 6% subordinated unsecured

30% of par »

I understand we won’t choose the last one because it has not the same seniority but how to choose between the first two ones?

Thanks

#2

You choose the “cheapest to deliver”. The 6% senior is worth 45% of par which is 4.5M. The second choice is 40% of par, which is worth 4M…

The cheapest to deliver is 4M, which is the 2nd choice.

#3

Thank you.

#4

cheapest to deliver which has same seniority with current bond in this case its 5 year unsecured trading at 40% of par