Credit event
An event affecting a borrower's ability to pay. In a credit default swap, a defined trigger for payout: bankruptcy, failure to pay and, in many contracts, restructuring that makes creditors worse off.
Where you will meet it
Credit event appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Set out what credit derivatives are and their main features
“The protection buyer pays a periodic premium, the CDS spread, to the protection seller; if a credit event occurs, such as bankruptcy, failure to pay or a qualifying restructuring, the seller compensates the buyer for the loss, by physical or cash settlement.”
- Explain credit default swaps (CDS), covering index CDS as well as single-name CDS, and the terms that specify a particular CDS contract
“A credit default swap transfers the credit risk of a reference entity from the protection buyer, who pays a periodic premium, to the protection seller, who pays out if a credit event occurs.”
- Explain what counts as a credit event for CDS and how CDS contracts are settled
“Credit events that trigger a CDS payout are bankruptcy, failure to pay and, in many contracts, restructuring that makes creditors worse off, such as a lower coupon or longer maturity.”
See also
Practise it
Practise credit event until it is automatic: questions that explain every wrong option.
Take the free diagnostic →