What is a "credit default swap"?
A. A tool used to lower taxes
B. A special kind of stock
C. An insurance contract on a loan or bond
D. A loan given to developing countries
Answer (2)
The correct answer is letter C. An insurance contract on a loan or bondA credit default swap (CDS) is like an insurance policy for investors. If the borrower fails to pay a loan or bond, the seller of the CDS must cover the loss. Before the 2008 crisis, many investment banks and insurers sold CDSs without making sure they had enough money to pay claims if loans failed. This made the crisis worse when defaults started. In the Philippines, insurance companies are closely watched to avoid similar problems and ensure that they can fulfill their promises to policyholders.
The correct answer is C. An insurance contract on a loan or bondA credit default swap (CDS) is a financial derivative that acts like insurance against the default of a borrower. If a company or government fails to pay back its debt (defaults), the CDS buyer receives compensation from the CDS seller. Investors use CDS to protect themselves from credit risk or to speculate on the likelihood of default.
