Upfront payment

Cash paid when a credit default swap starts, because its standard coupon differs from the fair spread: the buyer pays if the spread is above the coupon, and receives if below. Roughly (spread − coupon) × duration.

Where you will meet it

Upfront payment appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain credit default swaps (CDS), covering index CDS as well as single-name CDS, and the terms that specify a particular CDS contract
  CFA Level II · Fixed Income

  “Upfront payments settle the gap between spread and coupon.”

• Explain how credit default swaps can be used in an actively managed fixed-income portfolio
  CFA Level III · Portfolio Management Pathway

  “Contracts use standard coupons, with an upfront payment settling the difference from the market spread; for the protection seller, the value change is roughly −(change in spread × effective spread duration × notional).”

• Explain the principles behind how the market prices CDS and the factors that affect that pricing
  CFA Level II · Fixed Income

  “Contracts pay a standard coupon, and the upfront payment ≈ (spread − coupon) × CDS duration × notional, paid by the buyer when the spread exceeds the coupon.”

See also

Credit default swap

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with U · Glossary