Which outcome is associated with an effective CDS spread?

An effective Credit Default Swap (CDS) spread is directly related to the perceived risk of default on the underlying asset, such as a bond or a loan. The primary purpose of a CDS is to provide protection against the default of a borrower; therefore, the spread reflects the likelihood of that default occurring.

When the CDS spread is higher, it indicates an increased perception of credit risk, which correlates with a higher probability of asset default. Investors and market participants use the CDS spread as a gauge of creditworthiness; the higher the spread, the more compensation investors require to take on the risk associated with that asset. Consequently, a higher CDS spread suggests market participants believe there is a greater chance that the asset may default, thereby aligning with the idea that a higher probability of asset default is associated with an effective CDS spread.

In contrast, aspects such as stable interest rates, decreased trading volume, and a consistent repayment schedule are not directly linked to the credit risk assessment that the CDS spread encapsulates. Therefore, the association between an effective CDS spread and the probability of asset default is clear and significant.