What Is A Credit Default Swap (CDS)? A Credit Default Swap () is
a financial instrument that is effectively insurance on a bond.
The idea behind them is that the owner of a pays a certain
amount per year (interest rate basis points) and if the asset
that is backed by the defaults, the owner is paid off. A bond is
valued at 100 (par) and thewill pay the difference between the
market value of the bond and par at the time of default, i.e. if
bondholders receive 20 cents on the dollar the will pay 80 cents
per dollar. Originally they were used as an insurance or hedging
policy, but due to the fact that you do not have to own the
asset in order to buy a default swap on it, they have become
tools for relatively cheap speculation. For example, if an
investor believes that a corporation is going to default on its
debts, they could buy credit default swaps from an. The would
charge a certain amount per year in order to offer the
insurance. If the investor bought swaps on $10 million worth of
corporate bonds and the ch