Term
| Structure of Credit Default Swap(CDS) |
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Definition
Most popular type of credit derivative
Protects against a default of a company. Matches a bond from the reference entity with a spread. If ref entity defaults, holder can sell bond for notional value to seller. |
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Term
| 2 types of CDS settlement |
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Definition
Physical settlement: seller pays entire face value
cash settlement: the seller pays difference between face value and post credit event value |
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Term
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Definition
| spread *(value of extra spread payments + value of recoveries) - value of expected payoff |
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Term
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Definition
- Ratio of mortgage values to home prices increased
- Increased use of second lien loans
- increased issuance of mortgages with little/no documentation
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Term
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Definition
- market for structured credit will stay small, as investors will be unwillingly to invest in complex securities
- Credit rating process should improve (less AAA)
- investors need to be able to distinguish between single-name and structured, and amount of systematic risk
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Term
| Collaterialized Debt Obligation |
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Definition
A security is a type of Asset Backed Security where the pool of assets consists of bonds issued by corporations or countries
The pool of assets is sliced into tranches, with each one corresponding to a different amount of defaults.
A synthetic CDO can be created using Credit Default Swaps, since those replicate credit risk on a bond
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