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I understand that for a credit default swap (CDS), its CDS spread is the rate of payments that the buyer of the CDS makes to the seller in each year.

I also heard of "CDS rate". I wonder how it is defined generally? Is it same as CDS spread?

Thanks and regards!

6

A credit default swap is basically a form of insurance that the buyer of say, a bond, buys from a financial institution, say a bank, against the bond's going "bad" (not paying in full).

Say the value of the bond was $1,000. A bank might charge an annual amount $10 per thousand if it felt that the bond had a slightly less than 1% chance of going bad in the coming year (because the $10 would include a commission). If the buyer paid $10 or 1% (the credit default swap rate), the buyer would be purchasing the right to sell back the bond to the bank for $1,000, no matter what the bond was really worth. This would be the "swap." And its purpose would be to protect against credit default.

  • 1
    Thanks! Is CDS rate same as CDS spread? – Tim Nov 6 '11 at 17:26
  • 2
    @Tim: Yes it is. – Tom Au Nov 6 '11 at 17:28

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