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I am looking to understand the ISDA CDS Pricing Model for a 1Y "Buy Protection" CDS with Coupon = Quoted Spread = 100bp. Numbers are from Bloomberg.

Cash-Flow Matrix

Payment Date   Cashflow   Disc Factor   Survival Prob   Disc Cashflow
2019-09-20      -25,556    1.00053407          99.77%         -25,511
2019-12-20      -25,278    1.00144026          99.35%         -25,151
2020-03-20      -25,278    1.00219607          98.94%         -25,064
2020-06-22      -26.733    1.00283466          98.51%         -25,521
TOTAL --------------------------------------------------     -101,247

Summary

Accrued        -11,944
Premium Leg    -89,502  (= Sum of CashFlows - Accrued ≈ -101k + 12k)
Default Leg     89,502 

Principal            0  (= Sum of Premium Leg + Default Leg)
Cash Amount    -11,944  (= Sum of Principal + Accrued)


As I understand it, the Flat Hazard curve is calibrated to make Principal = 0 (zero in this example since coupon = spread). Questions:

  • It seems we calibrate minus the accrued on the premium leg, and then add it back to the Principal to get the actual Cash Amount. This double-usage seems confusing. Is this correct?
  • Assume every day we have spread = 100bp and thus Principal = 0, the resulting Premium Leg is still changing every day by the daily accrued amount. So the hazard rate will change a little bit every day to compensate for this? Despite the quoted spread never changing.
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