What is a credit default swap (CDS)?
Q: What is a credit default swap (CDS)?
A: A credit default swap is a type of investment where someone gets paid if a company defaults on its bonds.
Q: How is a credit default swap different from insurance?
A: A credit default swap is different because you can buy it for bonds you don't own, and there are not as many rules for CDS sellers.
Q: Who makes rules for insurance?
A: The government makes rules (called regulations) for insurance.
Q: Why do insurance companies have to have enough money in case lots of people need to collect insurance at the same time?
A: Insurance companies have to have enough money in case lots of people need to collect insurance at the same time to ensure they can pay out the claims.
Q: Why don't many rules exist for CDS sellers?
A: There aren't many rules for CDS sellers because it is a relatively new investment and the government has not yet created regulations for it.
Q: Can people speculate on companies using credit default swaps?
A: Yes, people can speculate on companies by buying credit default swaps for companies they think will get into trouble.
Q: How does a credit default swap act like insurance on bonds?
A: A credit default swap acts like insurance on bonds by providing protection against the risk of the company defaulting on its bonds.
