§ 01
| CDS Feature | Detail |
|---|---|
| Buyer pays | CDS spread (e.g., 150 bps/year on notional) |
| Buyer receives | Par − recovery value if default occurs |
| Seller receives | Premium income |
| Seller pays | The loss if default occurs |
| No default needed | CDS trades in secondary market based on spread changes |
§ 02
Annual CDS Premium = Notional × CDS Spread (bps) / 10,000
§ 03
CDS spreads are often a better real-time indicator of credit risk than rating agency grades. When CDS spreads spike, the market is pricing in deteriorating creditworthiness — often before the rating agencies downgrade.
§ 04
During major credit events, CDS spreads for affected companies spike from 100–200 bps to 1,000+ bps. Monitor financial news for CDS spread movements as an early warning of credit stress.
§ 05
A company’s CDS spread widens from 80 bps to 350 bps over three months. The credit rating hasn’t changed. What’s the market telling you?
§ 06
§ 07
You own $10M of XYZ corporate bonds. XYZ CDS trades at 200bp (meaning cost of protection is 2%/yr). If you buy protection, what are you buying?
Five questions · AI feedback
Sit with the ideas.
A company's CDS spread widens from 80 basis points to 350 basis points over three months, but its stock price has barely moved. What should an equity investor conclude?
Why: