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The contract could be structured as a straight insurance policy that pays out a defined amount in the event of a trigger condition being met, such as a payment being missed, the company seeking bankruptcy protection or being liquidated. Credit derivatives are not traded on exchanges but are further examples of instruments that are traded » Read More
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The credit spread is measured by comparing a company’s bond yields against those of Treasury notes with similar structure and term. If the bond’s credit spread rises above a predetermined level the contract pays out on a notional principal outstanding based on the difference between the actual spread and that defined in the contract. This » Read More
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A common covenant is to require the company to pay its debtors before making a dividend payment. In many cases such restrictions are extended to cover actions such as share buy-backs and capital reduction programs. There is an intrinsic conflict between shareholder interests and creditor interests and banks need to protect themselves from action that » Read More