[Verse 1]
When companies borrow money, there's always a risk
That they might not pay back what they owe
Credit default swaps are like insurance you can buy
Protection when the payments don't flow
[Chorus]
CDS, CDS, Credit Default Swaps
Insurance for your bonds when credit stops
Reference entity, protection buyer too
Premium payments, that's what you do
CDS, CDS, when defaults come around
Your insurance pays you back, protection can be found
[Verse 2]
There's a buyer of protection, paying fees each year
And a seller who takes on the risk
If the reference entity defaults on their debt
The seller pays the buyer, that's the gist
[Chorus]
CDS, CDS, Credit Default Swaps
Insurance for your bonds when credit stops
Reference entity, protection buyer too
Premium payments, that's what you do
CDS, CDS, when defaults come around
Your insurance pays you back, protection can be found
[Bridge]
Credit events trigger payouts
Bankruptcy or failure to pay
Settlement can be physical
Or cash compensation your way
[Verse 3]
You don't need to own the underlying debt
Speculation is allowed in this game
Price discovery and liquidity
That's how CDS markets got their fame
[Chorus]
CDS, CDS, Credit Default Swaps
Insurance for your bonds when credit stops
Reference entity, protection buyer too
Premium payments, that's what you do
CDS, CDS, when defaults come around
Your insurance pays you back, protection can be found
[Outro]
Risk transfer in the credit markets
CDS makes it possible to hedge
Understanding this derivative
Puts you right on the knowledge edge