When CDS spread > Fixed coupon, the buyer is paying less premium than what he is actually supposed to, hence he has to pay an upfront premium. I’m confused why are we not adding it to the price, but instead subtracting it? Intuitively that means the buyer has to pay less even though he is required to pay an upfront premium.
Don’t get the idea of the upfront premium and he price quote mixed up.
Upfront premium = (CDS - FC) x Dur
Price = 100 - upfront premium% (or 1 - upfront premium as decimal)
Nobody is paying the price it is just a way of quoting what is happening.
I am not 100% sure why it is this way but :
CDS = 3% FC = 1% Dur = 5
Upfront premium = (3 -1) x 5 = 10
Price = 100 - 10 = 90
If credit quality deteriorates the price will declines which makes more sense to me,