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Chapter 10. Beyond Their Means: Balance ... > Red Flag 7: When Insurance Against D...

Red Flag 7: When Insurance Against Defaults on Bonds Goes through the Roof

Investors in corporate bonds can buy a form of insurance against default by a borrower—called a credit default swap—that is proving to be an early warning signal of financial trouble. As a leading indicator ahead of the bankruptcies of Enron and WorldCom, it was more reflective of the risks than bond or stock prices. The price of buying such insurance for both companies climbed in the months ahead of their downward spirals into bankruptcy as investors sought to protect themselves against the worst possible outcome. The swaps aren’t exchange-traded, so retail investors will have to ask their brokers for information about how the cost is changing.


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