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Credit default swap
 

 

A financial instrument that provides insureince against the risk of default on debt instruments such as *bonds or ‘mortgage-backed securities. The buyer of the credit default swap pays a premium to the seller, which is usually a hedge fund, and in the event of default is entitled to a lump-sum payment, equal to the value of the debt, from the seller. The higher the perceived risk of the debt, the higher is the required premium.

 

Reference: Oxford Press Dictonary of Economics, 5th edt.