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

You may find that it is easier to settle a debt by using a credit default swap if both parties will agree.

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The credit default swap was useful to gain a better rate on the project and we were able to exercise that.

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There was going to be a credit default swap and I was eager to see how it would turn out for everyone, in the end.

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