Additional Credit Risk
A second borrower stands behind the bond.
Introduction
In every structured product you carry the credit risk of the issuer. Products in this category add a second one on purpose: the zero bond is replaced by a synthetic reference bond, a zero bond plus a credit default swap sold on a named reference entity. You collect the CDS premium as a higher coupon or a higher participation, and in return you carry the loss if that entity defaults.
Apart from the credit leg, the constructions are the familiar ones: a call for conditional capital protection, a short put for yield enhancement, a forward for participation. The payoff charts therefore come in two sets, one without a credit event and one with it, where the workbook assumes the product terminates and pays the recovery value.
The credit linked note itself has no equity underlying at all. Its chart uses the recovery value of the reference bond as the horizontal axis, because that is the only thing that changes the redemption.
The products
In workbook order. Each page has an interactive payoff chart and a construction visualiser.
- 1400SidewaysCredit Linked Note
A bond-like note whose coupon and repayment depend on a reference entity not defaulting.No capital protection Credit risk - 1410RisingCertificate with Conditional Capital Protection and Additional Credit Risk
A capital protection note whose protection depends on a reference entity not defaulting.Conditional protection Credit risk - 1420Sideways, Slightly risingYield Enhancement Certificate with Additional Credit Risk
A reverse convertible whose coupon is boosted by selling protection on a reference entity.No capital protection Credit risk - 1430RisingParticipation Certificate with Additional Credit Risk
A tracker funded by a synthetic reference bond: full equity exposure plus credit risk, in exchange for better terms.No capital protection Credit risk