The spread/ premium that reflects the a CDS market’s view of both probability of default and an assumption about the recovery (expected losses) -this will help determine the worth of a defaulted debt after the default. In other words, it denotes the premium (measured in basis points) that is paid to the protection seller in a credit default swap (CDS) or a similar credit derivative. It is what a protection seller gets paid for the credit/ default protection (that is provided to a protection buyer). It is very much similar to a premium paid by a policyholder in an insurance contract. Determining the size of a CDS premium depends on a number of factors including credit risk (default probability) and expected losses (associated with the coverage).

In a standard CDS contract, the premium is paid on a regular basis (typically quarterly). However, upon default, the protection buyer is bound to pay accrued CDS premium. When the spread is wide, the “name” (credit, reference entity, the debt being insured) will rather be quoted as upfront fee.