credit default swap

Definition

A specific kind of counterparty agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange of regular periodic payments (essentially an insurance premium). If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. In turn, the insurer pays the insured the remaining interest on the debt, as well as the principal.

Use credit default swap in a sentence

After paying a premium, the buyer of the credit default swap was able to transfer the risk of his mortgage backed securities in case of a debt default.

​ Was this Helpful? YES  NO 10 out of 10 people found this helpful.

Show more usage examples...

Browse by Letter: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
loan credit default swap index (LCDX) esoteric debt