Credit Default Swaps (CDS)
one of the ways that an individual, company, ? or financial institution can make money is by issuing loans or credit. sometimes this can be done by purchasing bonds. each of these bond purchases carry some risk of default. a credit default swap or cds shifts this risk onto an insurance company or other cds seller in exchange for a certain premium. there are three parties to a credit default swap, the cds buyer, the bond issuer which is the company or municipality that wishes to borrow money from the bond buyers in exchange for interest and the cds seller, a business or insurer that guarantees the underlying debt between bond issuer and buyer. for example, a company wants to raise money to expand it's business and does so by issuing bonds that pay 5% interest over ten years. at maturity, the bond principal is to be paid back as the issuer assumes it would have an enough money to do so at that date. the bond buyer has taken a risk by assuming that during the ten years preceding maturity they will receive 5% interest and at maturity receive their principal back. since there is always a chance that bond issuer will default especially if the bonds were rated low by rating companies such as standard and poor, the bond purchaser may choose to allocate some of the interest toward the purchase of a credit default swap. if they do, the cds seller will insure the principal amount and if the bond issuer defaults will pay it to the cds buyer.
- credit default swap（cds）・・・クレジットデフォルトスワップ