Question

The payoff diagram (value as a percent of pay) of a credit-default swap (CDS) is equivalent...

The payoff diagram (value as a percent of pay) of a credit-default swap (CDS) is equivalent to which of the following?

A. The CDS premium

B. The price of the defaulted bonds

C. The loss given default

D. The recovery rate

E. None is correct

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Answer #1

ANS: Option (A) (The CDS Premium)

A CDS is a financial derivative that allows the investors to swap or off-set their credit risk with another investors. & CDS is the premium paid to maintain the contract. There is credit Event contingency payment from protection seller investor to protection buyer & similarly, CDS premium is paid by protection buyer to Protection seller Investors. The Spread of CDS indicates the price that investors have to pay to insure against the company's default.

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