About Single Name CDS

CFA Level II Fixed Income
#1

I have some questions about single name CDS.

  1. The first one is about the second nature of single name CDS (where the first one senior unsecured obligation ).

“And debt obligation issued by the borrower that is pari passu (ranked equivalently in priority of claims) or higher relative to the reference obligation is covered.”

Does it means, for example, you bought some bonds from a certain reference entity and all these bonds can be covered by CDS. Then, when you are going to buy single name CDS to cover the bonds you bought, you would have only one option, which means one single name CDS for all the bonds you bought. Does it correct?

Or further, does it means a protection seller would issue only one kind of single name CDS for a certain reference entity?

  1. About the cheapest to deliver obligations.

Does it means you could potentially get extra benefit from your bonds and CDS. For example, if your bond has a discount of 20%, but another bond at the same level has a discount of 30%, the protection seller would give you 30% compensation according to the cheapest-to-deliver rule. Therefore, if you seller your bond with 20% discount, you would eventually gain a 10% extra benefit? Is it correct?

#2

From my understanding, if you have a single credit default swap , the coverage is usually for one reference obligation, meaning one bond unless you buy an index credit default swap where the protection is for several bonds.

To answer your second question, the cheapest to deliver obligations means that you, being the protection buyer will choose the cheapest bond to deliver to the counterparty and the counterpaty will pay you the face value of this bond, hence you ( the protection buyer) make a gain