The present value of the payments made to convert a bond subject to default to a default-free bond is called the
A)Insurance cost
B)Credit default swap premium
C)Annuity risk factor
D)Present value of the default volatility
E)None of the above

Question

Quizplus · Accepted Answer

The present value of the payments made to convert a bond subject to default to a default-free bond is referred to as the credit default swap (CDS) premium. This is the amount that the buyer of the CDS pays to the seller in exchange for protection against default by the issuer of the underlying bond. The CDS premium is essentially a form of insurance against credit risk. Choices A, C, and D are incorrect because they do not accurately describe the payment made in a CDS contract.

The Present Value of the Payments Made to Convert a Bond