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 the above.

Question

Quizplus · Accepted Answer

Credit default swaps are financial instruments that provide protection for the holder against a loss of value in case a borrower defaults on a bond. They work like insurance policies, and the holder of the swap pays a premium to the insurer in exchange for protection against the event of default. If the borrower defaults, the insurer pays the holder of the swap an agreed-upon amount. Therefore, Option C is the correct answer. Options A, B, D, and E are incorrect since they do not correctly describe credit default swaps.

Credit Default Swaps