From CFAI book
[question removed by moderator]
—> Why is he receiving $7M. Who is giving this $7M (The seller of Protection?). And please correct me if I am wrong the bond is at 40% of Par = $4M. The above answer says “sell the bond for $4M”. Whom are they selling the bond if the company has filed for bankruptcy?
Thanks
The payoff is based on the CTD bond. Because bond A is trading at 30% of par and bond B is trading at 40% of par, the payoff is based on bond A: 70% (= 100% − 30%) of par.
Yes: the CDS seller.
Anyone who wants to buy it. It says that bond B is trading at 40% of par, so someone is buying it. Perhaps a hedge fund that specializes in distressed securities.
Thank you for the reply.
My pleasure.