A credit derivative is a financial instrument that transfers credit risk from an underlying entity or entities without transferring the underlying asset itself. The most common types of credit derivatives include:
- Credit Default Swaps
- Total Return Swaps
- Credit Linked Notes
What is a Credit Default Swap?
A credit default swap can be comprised of several different forms, but the general notion is that two parties enter into an agreement where one party pays the other a regular, fixed payment, and the other party makes a payment if a specific credit event occurs, such a default or bankruptcy.
What is a Total Return Swap?
A total return swap is a method of transferring the market risk and credit risk of an underlying asset. This generally involves an agreement between two parties to swap recurring payments over a period of time.
What are Credit Linked Notes?
Credit linked notes, also known as credit default notes, is a fixed rate or floating rate note where the principal and/or coupon payments are tied to a credit or basket of credits. If there is no credit event, everything will be paid in full. If there is an event, the payment of the principal, and possibly the coupons, will be reduced.
Call a Los Angeles Stock Attorney Today
In addition to the above-mentioned credit derivatives, there are several more types available to investors. If you have been misled into investing in an unsuitable credit derivative, contact a Los Angeles stock attorney today for a consultation to discuss your legal rights.