Question

A company wants to sell a new issuance of bonds.  Its investment bankers survey the market and predict the interest rate the company would get from investors is far higher that it thinks it deserves.  So the company goes to an insurance carrier and enters a contract whereby if the company defaults on its bonds the insurer will pay the investors the dollar value of the defaulted payments, making them whole.  What is the name of the contract described in this deal?

Answer 1

This contract is popularly known as Credit Default Swap ( CDS )

It is a Over The Counter (OTC) derivate contract which is specifically designed to transfer the credit exposure of fixed income products like in this case bonds.

In this contract Company will be swap buyer and will make some payments to the swap seller until the maturity of the bond and in return swap seller will guarantees that in case of the default swap seller will make the payments for the bonds along with interest.

Therefore the name of contract mentioned in this deal is Credit Default Swap (CDS)