CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
In a single-name credit default swap (CDS), the protection buyer most likely:
The protection buyer in a CDS pays periodic premiums and, in return, receives a payment from the protection seller if a credit event occurs on the reference entity, such as bankruptcy or failure to pay. This works like insurance against default.
- Areceives a payment from the seller if a specified credit event occursCorrect
- Bpays the reference entity's coupons and receives the bond's principal
- Creceives periodic premiums and delivers the bond at maturity
Explanation
The CDS buyer pays periodic premiums (the spread) to the seller. In return, the seller compensates the buyer if a credit event on the reference entity occurs, such as bankruptcy or failure to pay. The other options describe a different cash flow pattern than the one in a CDS.
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