Which type of swap has obligations based on an underlying bond?

The correct answer is the type of swap that involves obligations based on an underlying bond, which is the Credit Default Swap. A Credit Default Swap (CDS) is a financial derivative that allows an investor to "swap" or transfer the credit risk of a bond or loan to another party. In a CDS, the buyer pays a periodic fee to the seller, who, in return, agrees to compensate the buyer in the event of a default or other credit event related to the underlying bond or loan.

The importance of this swap lies in its ability to provide protection to investors who wish to hedge against potential defaults in their bond portfolio. By purchasing a CDS, an investor ensures that they can recoup their investment in the event that the bond issuer fails to meet its debt obligations. This makes CDSs a crucial tool for managing credit risk in financial markets.

In contrast, other types of swaps, such as currency swaps, commodity swaps, and debt-equity swaps, do not have obligations directly tied to the underlying bond. Currency swaps involve exchanging principal and interest payments in different currencies, commodity swaps relate to the exchange of cash flows based on commodity prices, and debt-equity swaps involve converting a form of debt into equity in a company. These mechanisms serve