Credit default swaps:
A) will pay the holder the LIBOR interest rate.
B) pay the borrower the LIBOR interest rate.
C) are like insurance against a loss of value if the firm defaults on a bond.
D) limit the amount of borrowing of all parties in the credit default swap.
E) None of these.

Question

Quizplus · Accepted Answer

Credit default swaps are like insurance against a loss of value if the firm defaults on a bond. The holder of a credit default swap buys protection against the risk of default by a particular borrower. If the borrower defaults on the bond, the holder of the credit default swap is compensated for the loss in value of the bond.

Credit Default Swaps