Credit event

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?

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.