It is claimed that the credit default swap (CDS) spread should approximate the risky par bond yield or coupon rate spread from the riskless bond on the same entity. This comes about when we assume ...
Say I buy a 10-year bond with a notional of 100k. To hedge my credit risk entirely I could buy a 10-year CDS, also on a notional of 100k. Now, if there are only 5-year CDS trading and no 10-year CDS, ...