Understanding Credit Derivatives

ABC Corporation is evaluating the use of credit derivatives to manage its exposure to potential defaults on a portfolio of corporate bonds. The company's treasurer is particularly interested in understanding the different types of credit derivatives available and their implications for credit risk management. She comes across several terms, including credit default swaps (CDS), collateralized debt obligations (CDOs), and total return swaps (TRS).

After some research, she finds that credit default swaps allow investors to “swap” or transfer the credit exposure of fixed income products. She learns that in a CDS, the buyer pays a premium for protection against default, while the seller agrees to compensate the buyer in the event of a default.

Based on this context, which of the following statements about credit derivatives is true?