I have gotten alot of question on what the heck the app does, if you can give me feedback on this explaination I will post it to ijazsoftware.com and also add it to the app description in the App Store after I tweak it a little to ensure accuracy.

Here what is happening in concept..

It calculates the upfront fee on a Credit Default Swap, which is basically the same concept as a points upfront on a mortgage or unsettled interest on a bond.

Say you buy a bond today that started accruing interest 12/21/2009 and it pays its interested coupon on 3/20/2010. The person that holds the bond on 3/20/2010 gets the full interest covering the entire period from 12/21-3/20. Considering this when you buy the bond, say today on 2/5/2010 then the person buying the bond is entitled to the interest accrued from 12/21 to 2/5 which is 47 days of interest. In the bond market when you buy a bond, say at 98, this is a clean price and you pay the person .98*Face + unsettled interest on the current coupon. (FYI - If the price included the accrued interest it would be called a dirty price, but normally it does not.)

In a nut shell this is the basis of the calculation in the application. As we are doing a Credit Default Swap not a bond there are a few more components to the economic of the # but this is the basic concept. The fee is actually the accrued interest on the current coupon plus the difference in Present value of the contract at the fixed spread and a the same contract at the quoted spread. If you are doing a par trade (where the quoted spread == the running spread) then the fee is exactly the number described above. This is actually the behavior you see when you launch the application. You can see the FEE is equal to the Accrual. It will be different only if you change one of the 2 inputs, the quoted spread (the first button in the upper left hand corner) or the running spread (also called the Fixed Coupon) to a number that does not match the quoted spread. This is the 25/100/500/1000 selector right about the fee.

Now what each of these means and why the # are what they are is little longer explanation, here is a couple of good references I found on the Internet.

What is a CDS?

I was going to right something up but I think these resources on the internet do it better.

5 Minute Video: <<http://nalert.blogspot.com/2009/03/credit-default-swaps-explained-clearly.html>>

Wikipedia: <<http://en.wikipedia.org/wiki/Credit_default_swap>>

More Detailed Doc: <<http://www.markit.com/cds/documentation/resource/credit_indices_primer_july2009.pdf>>

What does the 25/100/500/1000 # mean?

With the standardization of the CDS markets new trades are based on standard fixed coupons of the numbers listed.(There are a few exceptions, ie re-couponing practices in Europe, but the app covers the 90% rule.) Here are some articles on standard on contract.

North America Market aka 'Big Bang': <<http://www.markit.com/cds/announcements/resource/cds_big_bang.pdf>>

European CDS Market aka 'Small Bang': <<http://www.markit.com/cds/announcements/resource/cds_small_bang_07202009_upd.pdf>>