Warning

Info

Warning

Info

Warning

Info

LSDefine

Simple English definitions for legal terms

credit default swap

Read a random definition: PMI

A quick definition of credit default swap:

A credit default swap (CDS) is a type of contract where two parties exchange the risk that a borrower will not be able to pay back their debt. The buyer of a CDS pays the seller a fee, and in exchange, the seller agrees to pay the buyer a lump sum if the borrower defaults. For example, if someone buys a CDS for a company's bonds, they are protecting themselves in case the company goes bankrupt and can't pay back the bonds. However, buying a CDS also carries its own risks, as the seller of the CDS may also default. CDS's played a role in the 2008 financial crisis, and now there are regulations in place to monitor and report all CDS transactions.

A more thorough explanation:

A credit default swap (CDS) is a type of financial contract where two parties exchange the risk that a credit instrument, such as a bond or loan, will go into default. The buyer of a CDS agrees to make periodic payments to the seller, and in exchange, the seller agrees to pay a lump sum to the buyer if the underlying credit instrument enters default.

Bob buys $1,000,000 in Blockbuster corporate bonds. He believes that the physical movie rental business is shrinking, and Blockbuster might declare bankruptcy soon and be unable to pay off the bonds he bought. Therefore, Bob purchases a CDS from a bank to cover the risk that Blockbuster defaults. In exchange for monthly premiums, the bank agrees to pay off the bond in the event that Blockbuster is unable to.

If Blockbuster defaults, Bob will receive the lump sum payment from the bank, which will cover the loss of his investment in the corporate bonds. If Blockbuster does not default, Bob will have paid the premiums for the CDS, but he will not receive any payment from the bank.

Credit default swaps can be used to mitigate risk, but they also carry risk in and of themselves. A CDS protects an investor from a third-party default but opens that investor up to the risk that the CDS seller itself will default. In this scenario, a party would lose not only the income from the underlying credit instrument which went into default, but they would also lose the money they paid in premiums to the CDS seller.

Credit default swaps played a large role in the financial crisis of 2008. In response, Congress passed the Dodd-Frank Act, which authorized the SEC and the CFTC to regulate the over-the-counter swaps market for securities, including CDS's. Current SEC regulations mandate that parties participating keep stringent records and report all CDS transactions.

Overall, a credit default swap is a financial contract that allows investors to protect themselves from the risk of a credit instrument going into default. However, it also carries its own risks and requires careful consideration before entering into such a contract.

credit counseling | credit facility

Warning

Info

General

General chat about the legal profession.
main_chatroom
👍 Chat vibe: 0 👎
Help us make LSD better!
Tell us what's important to you
ALSO CONGRATS!
Congrats1!
21:15
Miami A, yall I'm so excited I could cry.
21:15
Feel like I can finally stop holding my breath!! Whew!!!
[] baddestbunny
22:16
every time I get accosted by a strange man who follows me around because my male coworkers were too busy talking to walk me back to my car I get closer to saying we need to bring back traditional gender roles
Dkk
22:32
Nice! @Macaque
Dkk
22:32
@Aromatic, Have to guess.
Dkk
22:33
That sucks @Bunny do you have to go to the hospital?
[] baddestbunny
22:40
I said accosted not assaulted
23:35
guys. my notre dame address just went long is this good or bad
1a2b3c4d26z
23:37
Oooooo me too
23:37
omg is this good or bad
Dkk
23:47
Idk if gender roles are gunna fix that then.
23:49
it looks like most people who applied in october last cycle didn't get a decision until january... does it even mean anything that our addresses went long??
hows ED 2 compared to ED 1?
Dkk
0:10
No idea
windyMagician
0:34
reporting live to say my ndls address also went long
does it mean anything ^
Dkk
2:21
NDLS and Fordham took a very long time last year. It's good info for people to know.
[] baddestbunny
4:29
let’s get after it boys and girls
Dkk
5:21
I gtg to bed soon.
Dkk
5:22
Big day today. Gunna be a crazy one. I will sleep through the first half.
good morning lsd it is 5 am EST
also jazzy my ndls address went long ages ago i sadly do not think it means anything
my stanford address also went long LOL i think at most it's an indicator it's under review
WorthlessAttractiveZombie
7:44
My berkeley paragraph finally disappeared. I definitely think it is just an indicator that they are actively reviewing files, and does not mean anything about A, WL, or Rs
WorthlessAttractiveZombie
7:46
Also has anyone's date disappeared for W&L? Mine did last night
7:55
@WorthlessAttractiveZombie: mine did yesterday morning
7:56
Oops sorry I meant Vilanova. Mine disappeared last week
soapy
8:48
UMN under review! As predicted, decisions are gonna come out early December
LSD+ is ad-free, with DMs, discounts, case briefs & more.