Buy Credit Default Swaps. Several companies purchase the bond, thereby lending the company money. A credit default swap functions as an insurance policy on a bond.
A large investor or investment firm can simply go out and buy a credit default swap on corporate bonds it doesn't own and then collect the value of the credit default swap if the company defaults—without the risk of losing money on the bonds. Given that the contract pays out only if the condition under which it was structured is met (e.g. The bank’s policy requires all loans to be backed by a credit default swap on the principal amount of loans made.
If a default or another specified credit event occurs on the underlying debt , not only does the seller of the cds compensate the buyer, but he or she also takes ownership of the loan. He bought $27m in march, made a cool $2.6m profit. Given that the contract pays out only if the condition under which it was structured is met (e.g. They want to make sure they don't get burned if the borrower defaults, so they buy a credit default swap from a third party.
