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Credit Default Swaps

Credit Default Swaps are financial instruments that allow single parties to swap credit risk with other parties. The initiator of the swap is typically a lender and could assume the second party, which is a borrower could default on their debt obligations. In this Credit Default Swap agreement, the borrower must pay back the lender the principal and interest if the default occurs.
If the borrower believes that the pool's valuation will not decrease, they can agree to sell the Credit Default Swap to the lender which will earn them extra yield through all interests the lender pays.