Finacial-Edu: Your Financial Knowledge Source RESIDENTIAL REAL ESTATE EXCEL MODEL
 
Business
Accounting & Finance
Asset Management
Investment Tools
Project Management
- more
Guides & Courses
Excel & VBA
Trading & Investing
- more
Investing & Trading
Futures & Options
IRA + 401k
Quotes & Data
Real Estate & REITS
Software & Tools
- more
Software
Investing & Trading Software
Spreadsheets
- more
Tools & Models
Calculators
Forms & Templates
Graphing & Charting Tools
Risk & Portfolio Models
Trading Models
- more
 
  Print this page      
 

Credit Linked Note (CLN)

Author: Wikipedia

In this example you can see the coupons from the bank's portfolio of loans is passed to the SPV which uses the cash flow to service the credit linked notes.
In this example you can see the coupons from the bank's portfolio of loans is passed to the SPV which uses the cash flow to service the credit linked notes.

A credit linked note is a note whose cash flow depends upon a credit event, which can be a default, credit spread, or rating change. The definition of the relevant credit events must be negotiated by the parties to the note.

A CLN in effect combines a credit-default swap with a regular note (with coupon, maturity, redemption). Given its regular-note features, a CLN is an on-balance-sheet asset, in contrast to a CDS.

Typically, an investment fund manager will purchase such a note to hedge against possible down grades, or loan defaults.

Numerous different types of credit linked notes (CLNs) have been structured and placed in the past few years. Here we are going to provide an overview rather than a detailed account of these instruments.

The most basic CLN consists of a bond, issued by a well-rated borrower, packaged with a credit default swap on a less creditworthy risk.

For example, a bank may sell some of its exposure to a particular emerging country by issuing a bond linked to that country's default or convertibility risk. From the bank's point of view, this achieves the purpose of reducing its exposure to that risk, as it will not need to reimburse all or part of the note if a credit event occurs. However, from the point of view of investors, the risk profile is different from that of the bonds issued by the country. If the bank runs into difficulty, their investments will suffer even if the country is still performing well.

The credit rating is improved by using a proportion of government bonds, which means the CLN investor receives an enhanced coupon.

Through the use of a credit default swap, the bank receives some recompense if the reference credit defaults.

There are several different types of securitized product, which have a credit dimension. CLN is a generic name related to any bond whose value is linked to the performance of a reference asset, or assets. This link may be through the use of a credit derivative, but does not have to be.

  • Credit Linked Notes CLN: Credit Linked Note is a generic name related to any bond whose value is linked to the performance of a reference asset, or assets. This link may be through the use of a credit derivative, but does not have to be.
  • Collateralized Debt Obligation CDO: Generic term for a bond issued against a mixed pool of assets - There also exists CDO-squared (CDO^2) where the underlying assets are CDO tranches.
  • Collateralized Bond Obligations CBO: Bond issued against a pool of bond assets or other securities. It is referred to in a generic sense as a CDO
  • Collateralized Loan Obligations CLO: Bond issued against a pool of bank loan. It is referred to in a generic sense as a CDO

CDO refers either to the pool of assets used to support the CLNs or, confusingly, to the CLNs themselves.

 
 
 
Author URL: http://www.wikipedia.org
 


SHARE THIS ARTICLE: Digg this del.icio.us Netscape reddit Fark Slashdot
     
   
   
 
 
 
 
Excel Real Estate Model
 
Home | Guides + Courses | Tools + Models | Articles Library | Site map
Copyright 2000-2013 Financial-edu.com. All rights reserved.