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. Who is the counterparty of a derivative?

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  2. In what types of financial situations would credit spread risk be applied instead ...

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  3. What are some risks a company takes when entering a currency swap?

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  4. Should you calculate Value at Risk (VaR) for counterparty credit risk?

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  5. When was the first swap agreement and why were swaps created?

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