Credit Linked Note
A bond-like note whose coupon and repayment depend on a reference entity not defaulting.
Payoff at maturity
Move the parameters; the product formula and its building blocks are recomputed from the same engine that is tested against the workbook.
- No credit event
Redemption 106 %
Per 10'000 of nominal
| Recovery value | Level | Redemption | Amount | Gain / loss |
|---|---|---|---|---|
| recovery 10 % | 10 % | 106 % | 10'600 | +600 |
| recovery 40 % | 40 % | 106 % | 10'600 | +600 |
| recovery 70 % | 70 % | 106 % | 10'600 | +600 |
Coupons are shown as paid at maturity together with the nominal. Costs, taxes and the price you paid are not included. Scenario: No credit event.
Data table and formulas
Credit Linked Note (1400), scenario "No credit event": redemption at maturity for an underlying at 0 % → 106 %; 6 % → 106 %; 50 % → 106 %; 100 % → 106 % of its initial level.
| Series | Formula | 0 % | 25 % | 50 % | 75 % | 100 % |
|---|---|---|---|---|---|---|
| Zero Bond | 100 | 100 | 100 | 100 | 100 | 100 |
| Short Credit Default Swap - Reference Entity | coupon | 6 | 6 | 6 | 6 | 6 |
| Product | 100 + coupon | 106 | 106 | 106 | 106 | 106 |
Largest difference between the sum of the blocks and the product formula over the grid: 0.0e+0.
How it is built
Each block drawn on its own, then added. The last chart is the sum, and it is identical to the product line above.
- Zero Bond100
- Short Credit Default Swap - Reference Entitycoupon
- Product: no credit event100 + coupon
Largest gap between the sum of the blocks and the product formula on this grid: 0.0e+0. The same identity is tested for every product and scenario in the site's test suite.
Construction, as listed in the workbook
- Zero Bond (face = nominal)
- Short Credit Default Swap - Reference Entity (investor sells protection and receives the premium as coupon)
In plain English
You hold a zero bond and sell credit protection on a reference entity through a credit default swap. The CDS premium is added to the bond interest, which is why the coupon is higher than that of a comparable bond.
If no credit event occurs, you receive the nominal plus the coupon. If the reference entity defaults, the CDS pays out against you: you receive the recovery value of the reference bond instead of the nominal. The x-axis of this chart is therefore the recovery value, not an equity level.
Chances and risks
Chances
- Higher coupon than a comparable bond.
- Exposure to credit without buying the bond itself.
Risks
- Two credit exposures: the issuer and the reference entity.
- After a credit event you receive the recovery value, which can be far below the nominal.
- The product is often illiquid.
Who it fits
- Investors who understand credit risk and want a specific exposure with a higher coupon.
Who it does not fit
- Investors who treat this as a bond substitute without studying the reference entity.
Features that can be added
Cross-category features from the workbook that issuers attach to this type.
Nearby on the map
- 1410Additional Credit RiskCertificate with Conditional Capital Protection and Additional Credit Risk
A capital protection note whose protection depends on a reference entity not defaulting.Credit risk - 1420Additional Credit RiskYield Enhancement Certificate with Additional Credit Risk
A reverse convertible whose coupon is boosted by selling protection on a reference entity.Credit risk - 1430Additional Credit RiskParticipation Certificate with Additional Credit Risk
A tracker funded by a synthetic reference bond: full equity exposure plus credit risk, in exchange for better terms.Credit risk