Credit Default Swaps – A Primer
A credit default swap is a type of credit derivative. Credit derivatives “derive” their value from an underlying credit instrument; generally the bonds of sovereign nations or the bonds of a corporate entity. In recent years, credit derivatives have been created that are based obligations rather than entities; one common reference obligation are asset backed securities based on home equity loans.
A credit default swap is a contract that allows one to take or reduce credit exposure. The contract is between the two parties and does not directly involve the underlying reference entity. A credit default swap is essentially an insurance policy where one entity pays a premium to a second entity to take on the risk of a loss.
Let’s look at a fictitious example.
What was the top marginal federal tax rate for individuals in 1955?
Why America’s Richest Man Thinks He Should Pay More Taxes.
Part I of a multipart series
Warren Buffett, thinks the U.S. tax system is unfair. The $62 billion dollar man thinks he should pay more taxes, as a share of his income, than he does now. Buffett, know for his simple tastes (hamburgers and Cherry Coke) and frugal lifestyle, sticks out among his fellow billionaires; perhaps most famously for arguing that the tax system in the United States isn’t as progressive as one might think.
In an experiment of one, Buffet polled his coworkers to find out how their effective tax rate compared to his rate of 17.7%. The results of Warren’s poll: Buffett’s $60,000 a year secretary paid 30% of her income to the federal government and the average effective tax rate for the office mates who took the poll was 32.9%. Not one of the fifteen employees who took Warren’s poll paid a lower percentage of their income in taxes than Buffett’s 17.7% effective tax rate.
NBC’s Tom Brokaw interviewed Buffet about his informal office poll:
Of course, Warren is paying much more in absolute terms; he paid roughly $8 million in federal taxes last year. In a system that is supposed to be progressive, how can it be that the world’s richest man pays a lower tax rate than his receptionist? Is it just a fluke limited to Mr. Buffett and his coworkers, or is this a broader trend?
Read on, calculate your effective tax rate and take our poll.