Name: Credit default swaps | Finance & Capital Markets | Khan Academy
Uploaded: 2020-03-03T08:01:46.000Z
Duration: 10 min 57 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

The imperative

Let's say that I'm a pension fund, and I have money to lend

To-infinitive

And I want to lend it to other people, because that way I can

get interest on it instead of it just kind of sitting and

And if I lend it to someone other than the government,

I'll get better interest. So let's say that there's-- so

And let's say that there's some corporation,

They need to borrow money, maybe to buy a factory or to

do something else, we're not going to get involved in what

I manage the retirement fund for the teachers of

And part of my charter says that I can only invest in

So I'm not allowed to go gamble people's money, because

I can only invest in things that are rated AAA,

I'm just kind of making this up on the fly.

These are things that have a very low chance of default.

But Corporation A is only rated, I don't know, let's say

And actually, this is a good time to think about well who

And you might think, oh, it surely is a government entity,

because only the government would be objective enough give

all of these corporations frankly objective ratings.

They're private entities, that are actually

And I think I touched on it in the video on collateralized

But their incentives are a little bit strange.

Moody's is one of the ratings agencies, and they rate

So they've said, these guys, they're pretty good, but

they're not the U.S. government or something.

There's a chance that they can go under, for whatever

reasons, or they're sensitive to the economy as a whole.

And I say, man, I would love to lend these guys money.

And these guys are willing to pay me 8% interest. But I

Because I'm only allowed to lend money to A or

Or I can only buy A or above type of instruments.

I have money to give him, but his corporate credit rating,

that was given by Moody's, just isn't high enough for me

And this is where credit default swaps come in.

In an ideal world, I would give Corporation A, I would

And then maybe they would annually give me, let me make

And then this might have a term for 10 years, and then

after 10 years, they'll pay me the $1 billon back and then

But as I said multiple times, I can't do it, because they

And my charter says I can only invest in A rated bonds.

And these entities are essentially insurance

A lot of banks did this, a lot of insurance

There are some companies that just specialize in writing

collateralized-- sorry, in writing credit default swaps.

Well first of all, it's important to note that Moody's

has given AIG, I don't know, let's give it a AA rating.

I don't know what their actual rating was.

They said, you know what, they are almost risk-free.

Moody's has looked at their books, or supposedly, or

hopefully has looked at their books, and says, oh you know,

Subtitles ListPlay Video

Credit default swaps | Finance & Capital Markets | Khan Academy

essentially

equivalent

guarantee

determine