Consider a CDS on a three-year bond. If the bond defaults, It will only be in the middie of a year. In the event of a default, the recovery rate is 40%. The risk-free rate is 10%. If the hazard rate is 2.90% for each of the three years, estimate the CDS spread. Oa 1.96% Ob 1.83% OC 172% Od 247% Oe. 219%

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Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.