An Introduction to Credit Derivatives, 2nd Edition

Chapter 3

Credit Derivative InstrumentsPart II

We have noted that credit derivative instruments exist in funded and unfunded variants. The previous chapter looked at unfunded credit derivatives; in this chapter we consider funded credit derivatives, by which we mean principally the credit-linked note.

3.1 Credit-Linked Notes

Credit-linked notes (CLNs) are a form of credit derivative. They are also, in all their forms, bond instruments for which an investor pays cash, in order to receive a periodic coupon and, on maturity or termination, all or part of its initial purchase price back. That makes CLNs similar to bonds. The key difference is that the return on the CLN is explicitly linked to the credit performance of the reference security or reference ...