Hi, Would you agree that the below statement from Schweser about CDS market value: ‘Buyer essentially takes a short position in the reference bond (i.e., value of CDS increases as market value of bond decreases)’ only holds true if prevaliling interest rates are constant? Thanks edit:spelling
They statement is correct. I don’t know about the interest rates being constant though.
yes b/c the yield that the market will require on the bond will rise as the credit quality of the issuer falls (even if interest rates are constant). higher red’d yield= lower bond px
Actually CDS value is independent from changes in interest rate, because a shift for the yield curve will affect both the X-rating bond and AAA rating bond values (if they are with similar maturity), thus swap spread will remain the same. The only credit rating change affect swap spread increase/decrease in this case.