The rate of payments made per year by the buyer is known as the CDS spread. Suppose
that the CDS spread for a five-year contract on Ford Motor Credit with a principal of $10
million is 300 basis points. This means that the buyer pays $300,000 per year and obtains
the right to sell bonds with a face value of $10 million issued by Ford for the face value
in the event of a default by Ford.1
The credit default swap market has grown rapidly since
the International Swaps and Derivatives Association produced its first version of a
standardized contract in 1998.