Question #5
Reading: Reading 29 Credit Default Swaps
PDF File: Reading 29 Credit Default Swaps.pdf
Page: 2
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
A credit default swap (CDS) will change in value:
Answer Choices:
A. only when a failure to pay, a bankruptcy, or a restructuring occurs
B. whenever the credit quality of the reference entity changes
C. only when default occurs
Explanation
CDS change in value over their lives as the credit quality of the reference entity changes;
this leads to gains and losses for the CDS counterparties. This change in value will happen
even though default may not have occurred – and even if it may never occur.