A contract in which one party agrees to pay the other party a fixed periodic payment, while the other party agrees to compensate the first party in the event of certain credit events, generally bankruptcy, default, or credit restructuring. A credit-default swap is essentially an insurance contract in which a lender transfers risk to another party, who is compensated by a series of agreed-upon payments.
A financial trans-action in which the holder of a debt
instrument pays a premium for protection from a loss in the case of default.
This may be accomplished by purchasing an option or credit insurance, rather
than a true swap. All of the credit risk can be transferred by using a total