Credit default swaps are
A) an insurance product designed to protect financial institutions from customers who default on their loans.
B) securities with a maturity of less than one year.
C) the result of a leveling off or slowing down of stock price increases.
D) market trades in previously issued securities.

Question

Quizplus · Accepted Answer

Credit default swaps (CDS) are a type of insurance product designed to protect financial institutions from customers who default on their loans. They are contracts between two parties, where one party agrees to compensate the other party in the event of a default. The buyer of the CDS pays a premium to the seller, and in return, the seller assumes the risk of default. CDS played a significant role in the 2008 financial crisis, particularly in the collapse of Lehman Brothers.

Credit Default Swaps Are