credit default swaps (CDSs)

A credit default swap (CDS) is like insurance for a loan or bond. If an investor owns a bond and worries the issuer might default (fail to pay), they can buy a CDS from another party. In exchange, the seller agrees to compensate the investor if the issuer defaults. The buyer pays regular premiums for this protection, and if a default occurs, the seller covers some or all of the losses. CDSs help investors manage credit risk and can also be traded for profit, but they can be complex and involve significant risk if not properly understood.