[Verse 1] When a company might default on debt Credit spreads tell us what markets expect Higher risk means higher premium to pay CDS protects you if bonds blow away Three key factors work together as one Spread and probability, recovery when done [Chorus] Credit Default Swaps, they price what you fear Spread times probability minus what's clear Recovery rate cuts the loss that you face Remember this formula, keep it in place CDS premiums, they mirror bond spreads Protecting your money when credit turns red [Verse 2] Default probability shows the chance That borrowers can't meet their finance dance If ten percent chance they'll fail to repay Your CDS pricing reflects that decay Recovery rate is what's left when they fall Forty cents back means you lose sixty overall [Chorus] Credit Default Swaps, they price what you fear Spread times probability minus what's clear Recovery rate cuts the loss that you face Remember this formula, keep it in place CDS premiums, they mirror bond spreads Protecting your money when credit turns red [Bridge] Bond spreads and CDS move hand in hand When credit risk rises across the land If corporate bonds show widening gaps CDS premiums follow those maps Market arbitrage keeps them aligned Two different products with similar mind [Verse 3] Credit triangle shows the connection true Spread equals default times loss given you Loss given default is one minus recovery This relationship solves the discovery When bond yields spike above risk-free rate CDS premiums calculate at similar state [Chorus] Credit Default Swaps, they price what you fear Spread times probability minus what's clear Recovery rate cuts the loss that you face Remember this formula, keep it in place CDS premiums, they mirror bond spreads Protecting your money when credit turns red [Outro] Three factors dancing in credit's game Spread, default, recovery - learn each name When you understand how they interact CDS pricing becomes a fact
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