CDS

A credit default swap (CDS) is an agreement that the seller of the CDS will compensate the buyer in the event of underlying bond default. The buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the underlying bond defaults. In the event of default the buyer of the CDS receives compensation (usually the face value of the bond), and the seller of the CDS takes possession of the defaulted bond.

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