ISDA CDS Coupons 100 vs 500

CFA Level II Derivatives
#1

Hi there, can anyone please help me understand the trigger points for assigning the coupons in a CDS contract? Is it as black and white as credit ratings? I.e. reference entity is rated IG on day 1 and so trades in 100bps coupon, then moves to Non IG on day 2 and therefore any subsequent CDS contracts written will be based on 500bps?

Trying to understand if you can hold 100 and 500 contracts on the same name at the same time and how the prices of each would compare?

#2

It is my understanding that the CDS coupon is fixed (whether it’s 100 or 500 bps) on the trade date and doesn’t change over the life of the contract. When the credit risk of reference entity changes over the life of the contract, it will reflect on the value of the CDS and mark to mkt credit spread.

Whenever the CDS contract is set, the pricing will depend on the current conditions of the reference entity.