Credit-Linked Notes

Abstract

A credit linked note (CLN) is a type of funded credit derivative in which the investor in the note, the credit protection seller, makes an upfront payment to the issuer of the note, the protection buyer. If no credit event occurs during the life of the note, the redemption value of the note is paid to the investor upon maturity. If a credit event does occur, then a value less than par is paid out to the investor upon maturity. For the investor, a CLN may entail some additional credit risk in return for a coupon that is somewhat higher than for other comparable investments in the market. This article explains how CLNs work and discusses some recent applications.