Understanding Credit Default Swaps

What is the primary purpose of a credit default swap?

• To provide insurance against the failure of a security

• To increase the value of a security

• To diversify an investment portfolio

• To guarantee a fixed return on investment

Why are credit default swaps for equity tranches more expensive?

• They are easier to trade

• They cover high-risk securities

• They are considered low risk

• They offer a higher payout

What makes senior tranche credit default swaps cheaper?

• They are not affected by market changes

• They have a higher rate of return

• They are considered low risk

• They are more likely to pay out

In 2008, why did some investors buy a large number of credit default swaps?

• They were following a market trend

• They believed the market was undervalued

• They identified misvalued securities

• They wanted to diversify their portfolio

What was the outcome for investors who bought credit default swaps during the 2008 crisis?

• They suffered significant losses

• They received a moderate return

• They broke even

• They achieved a massive payday