CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

Suppose a company has been having problems. It may be possible to buy the company's outstanding debt (usually bonds) at a discounted price. If the company has $1 million worth of bonds outstanding, it might be possible to buy the debt for $900,000 from another party if that party is concerned that the company will not repay its debt. If the company does in fact repay the debt, you would receive the entire $1 million and make a profit of $100,000. Propose an alternative way to take advantage of this opportunity without investing $900,000.
Correct Answer: Cne could enter into a credit default swap with the other investor, by selling credit protection and receiving a premium of $100,000. If the company does not default, one would make a profit of $100,000 without having invested anything.

User Contributed Comments 1

User Comment
tianhes This is the intuition behind credit default swaps.
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