Question regarding CDS fixed coupon payment period

CFA Level III Fixed Income
#1

Hi there,

I understand that the fixed coupon paid periodically by the protection buyer is standardised to 1% for investment-grade (IG) issuers and 5% for high-yield (HY) issuers.

Maybe it’s a stupid question but anyone can tell me whether this is annualised rate?

I have this doubt because of an example question from Schweser Notes Module Quiz 14.5

"An active credit manager decides to overweight exposure to an investment-grade company using $10 million notional of CDS contracts with tenor of 5 years, a CDS spread of 150 basis points, and a spread duration of 4.5. Three months later, the CDS spread is 120 basis points and the spread duration is 4.25. The profit from the CDS trade is to:

A. $100,000. B. $140,000. C. $240,000."

I thought the fixed coupon rate 1% is annual so the coupon income = 0.01 × $10,000,000 × 3/12 = $25,000. In the answer, coupon income during the three months = 0.01 × $10,000,000 = $100,000.

Could someone help me?

#2

It is.

Interest rates are always – always! – quoted as annual rates.

#3

Thank you for confirming !

I guess in this case, the answer from Schweser Notes is wrong - because the 1% CDS fixed coupon rate is annual, the three-month coupon income should be 0.01 × $10,000,000 × 3/12 = $25,000.

#4

Color me shocked.