A credit default swap functions like an insurance policy against the possibility of default on a bond or other security collateralized by debt.

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A credit default swap is essentially a contract between two parties, where one party pays a premium to the other party in exchange for protection in case the bond or security collateralized by debt defaults. The protection acts like an insurance policy, paying out to the buyer of the swap if the default occurs.

A Credit Default Swap Functions Like an Insurance Policy Against