Estimating a hazard rate by bootstrapping the hazard rates from CDS spreads:
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Estimating a hazard rate by bootstrapping the hazard rates from CDS spreads:


Bootstrapping the

hazard rates from CDS spreads

Consider a Credit Default Swap with maturity 2 years, paying a premium

with semi-annual frequency. Assume that defaults can occur only at times

0.25 years, 0.75 years, 1.25 years and 1.75 years. The CDS spread is 150 basis

points. Assume that the risk-free interest rate is 5% and the recovery rate

is 30%. What is the hazard rate of the reference name? Assume a constant

hazard rate for the entire maturity of the CDS.

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