Credit events are a crucial aspect of a credit default swap, or CDS. For example, holders of Fannie Mae or Freddie Mac bonds may have bought a CDS- in effect a type of insurance contract- which specifies the circumstances under which the CDS seller has either to pay them cash compensation, or perhaps buy their bonds for a pre-agreed price. Such circumstances are known as 'credit events' and may include a firm defaulting, or having its bonds downgraded. In addition, 'force majeure' clauses specify unusual conditions- such as a war, act of God or nationalisation- under which existing contracts may have to be cancelled and unwound so both parties can be returned to their pre-contractual positions.
Watch Tim Bennett's video tutorial: Credit default swaps - should investors be worried?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Can you afford to retire in 2025?From interest rates and inflation to tax changes, there are plenty of factors to consider if you plan to retire next year – here is how to prepare.
-
8 of the best properties for sale near ski slopesThe best properties for sale near ski slopes – from a luxury cabin in Geilo, one of Norway’s premier ski resorts, to a large chalet in Valais, Switzerland
