DEFINITION of 'Credit Default Insurance'

The use of a financial agreement - usually a credit derivative such as a credit default swap, total return swap, or credit linked note - to mitigate the risk of loss from default by a borrower or bond issuer.

BREAKING DOWN 'Credit Default Insurance'

Credit default insurance allows for the transfer of credit risk without the transfer of an underlying asset. The most widely used type of credit default insurance is a credit default swap. Credit default swaps transfer credit risk only; they do not transfer interest rate risk. Total return swaps transfer both credit and interest rate risk.

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RELATED FAQS
  1. What are some risks a company takes when entering a currency swap?

    Read about the risks associated with performing a currency swap, including counterparty credit risk in the event that one ... Read Answer >>
  2. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  3. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  4. Should you calculate Value at Risk (VaR) for counterparty credit risk?

    Learn how value at risk (VaR) may be used to determine the risk of counterparty default for credit default swaps and other ... Read Answer >>
  5. What level of default rate is typical for the credit services industry?

    Learn how default rates affect businesses in the credit services industry, and what rates are considered normal for a company ... Read Answer >>
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    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
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