North American Loan Credit Default Swap Index - LCDX

AAA

DEFINITION of 'North American Loan Credit Default Swap Index - LCDX'

A specialized index of loan-only credit default swaps (CDS) covering 100 individual companies that have unsecured debt trading in the broad secondary markets. The LCDX is traded over the counter and is managed by a consortium of large investment banks, which provide liquidity and assist in pricing the individual credit default swaps.

The index begins with a fixed coupon rate (225 bps); trading moves the price and changes the yield, much like a standard bond. The index rolls every six months. Buyers of the index pay the coupon rate (and purchase the protection against credit events), while sellers receive the coupon and sell the protection. What is being protected is a "credit event" at the company, such as defaulting on a loan or declaring bankruptcy.

If a credit event occurs in one of the underlying companies, the protection is paid out via physical delivery of the debt or through a cash settlement between the two parties. The underlying company is then removed, and a new one is placed in the index to return it to 100 members.

INVESTOPEDIA EXPLAINS 'North American Loan Credit Default Swap Index - LCDX'

Credit default swaps essentially put a price on the risk of a particular debt issuer's default. Companies with strong credit ratings have low risk premiums, so protection can be purchased for a minimal fee, assessed as a percentage of the notional (dollar) amount of the underlying debt. Companies with low credit ratings cost more to protect against, and the credit default swaps covering them may cost several percentage points of the notional amount.

Minimum purchase amounts for the LCDX run in the millions, so most investors are large institutional firms who invest as either a hedge or a speculative play. The advantage is that one can gain access to a diversified group of companies for much less than purchasing the credit default swaps individually.

RELATED TERMS
  1. Risk

    The chance that an investment's actual return will be different ...
  2. Secondary Market

    A market where investors purchase securities or assets from other ...
  3. Loan Credit Default Swap (LCDS)

    A type of credit derivative in which the credit exposure of an ...
  4. Cash Settlement

    A settlement method used in certain future and option contracts ...
  5. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  6. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
Related Articles
  1. Dissecting The Bear Stearns Hedge Fund ...
    Insurance

    Dissecting The Bear Stearns Hedge Fund ...

  2. Junk Bonds: Everything You Need To Know
    Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

  3. Credit Default Swaps: An Introduction
    Bonds & Fixed Income

    Credit Default Swaps: An Introduction

  4. Practical And Affordable Hedging Strategies
    Options & Futures

    Practical And Affordable Hedging Strategies

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center