CDS premiums

[rickm123]

Hi David:

If a single name CDS has a spread of say 800 bps is the the quarterly premium paid by the buyer 200 bps of the notional..also if that is the case is this fixed for the life of the swap or flutuates with the market.

Also the 800 bps spread is over what and what is the relation to the corporate spread?

Thanks

 

[ShaktiRathore]

The spread is fixed for the life of the swap. CDS is an agreement between two parties whereby the protection buyer pays spread quarterly to CDS seller and seller recieves this spread for assuming the credit risk of the bond or other instrument.
For. e.g. if protection buyer X wants to protect against default in payments by the bonds it is holding then it can buy a CDS swap from the seller Y. Y will receive periodic payments from X for assuming the default risk from bond. If there is default by the bond then X will receive from Y the value it was to receive had the bond was not in default . If there is no default than Y will still recieve the periodic payments from X and X will receive nothing as there is now no default of the bond.
Corporate bonds spread includes credit risk spread. When CDS buyer who wants to protect against default by bond will not assume credit risk of the bond and thus the CDS spread is to compensate for this credit risk. The net payment to CDS buyer from the bond will be corporate spread-credit spread.

thanks