Credit Linked Note - CLN

AAA

DEFINITION of 'Credit Linked Note - CLN'

A security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors.

CLNs are created through a Special Purpose Company (SPC), or trust, which is collateralized with AAA-rated securities. Investors buy securities from a trust that pays a fixed or floating coupon during the life of the note. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate. The trust enters into a default swap with a deal arranger. In case of default, the trust pays the dealer par minus the recovery rate in exchange for an annual fee which is passed on to the investors in the form of a higher yield on the notes.

INVESTOPEDIA EXPLAINS 'Credit Linked Note - CLN'

Under this structure, the coupon or price of the note is linked to the performance of a reference asset. It offers borrowers a hedge against credit risk, and gives investors a higher yield on the note for accepting exposure to a specified credit event.

RELATED TERMS
  1. Equity Linked Note - ELN

    An instrument whose return is determined by the performance of ...
  2. Default Risk

    The event in which companies or individuals will be unable to ...
  3. Credit

    1. A contractual agreement in which a borrower receives something ...
  4. Credit Derivative

    Privately held negotiable bilateral contracts that allow users ...
  5. Credit Default Insurance

    The use of a financial agreement - usually a credit derivative ...
  6. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
RELATED FAQS
  1. Why should you invest in tangible assets?

    Savers who deliberately buy tangible assets for investment purposes value their tangible goods as a form of value diversification ... Read Full Answer >>
  2. How much of the asset management industry has moved from traditional managers to ...

    While the exact numbers are difficult to calculate due to variations in measurement and the overall growth of the asset management ... Read Full Answer >>
  3. What role did junk bonds play in the financial crisis of 2007-08?

    Junk bonds were the at heart of the financial crisis of 2007-2008. Toxic assets related to the subprime housing market pushed ... Read Full Answer >>
  4. Which asset classes are the most risky?

    Equities is the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the ... Read Full Answer >>
  5. How do I purchase shares of a closed-end investment?

    Unlike open-end mutual funds that sell shares in the fund directly to investors, closed-end funds are traded on an exchange ... Read Full Answer >>
  6. How do you find accrued interest on a bond?

    A bond is a debt instrument issued by a company, government agency or municipality to raise money. Interest payments are ... Read Full Answer >>
Related Articles
  1. Investing Basics

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  2. Options & Futures

    20 Investments You Should Know

    To take advantage of all your investing options, you need to know what your choices are. Here we tell you about the diverse features and advantages of 20 different financial instruments.
  3. Investing

    Bitcoin Vs. Litecoin: What's The Difference?

    Litecoin is often referred to as "the silver to Bitcoin's gold." But what is Litecoin, and how does it compare to its more famous counterpart?
  4. Forex Education

    Why Governments Are Afraid Of Bitcoin

    Bitcoin is the first decentralized peer-to-peer payment network and cryptocurrency. Governments may fear Bitcoin because its value is determined by users and not central governments or banks. ...
  5. Mutual Funds & ETFs

    Pros & Cons Of Bond Funds Vs. Bond ETFs

    Understanding the pros and cons of bond funds and bond ETFs will help you choose the instrument that is best for building your diversified bond portfolio.
  6. Forex Education

    Countries Where Bitcoin Is Legal & Illegal

    Although bitcoin has been in existence for five years, most countries still do not have consistent laws regulating the cryptocurrency. However, a few countries have banned bitcoin altogether.
  7. Stock Analysis

    Fight Volatility and Inflation with Infrastructure

    As institutional investors flock to infrastructure assets there's good reason for retail investors to follow suit.
  8. Mutual Funds & ETFs

    Pros and Cons: Preferred Stock ETFs vs. Bond ETFs

    A look at the differences between preferred stock ETFs and bond ETFs and when you should invest in one over the other.
  9. Savings

    How to Invest in Liquor (and Avoiding the Hiccups)

    Investing in liquor has been profitable for ages but there could be some hiccups along the way.
  10. Investing Basics

    What is a Foreign Institutional Investor?

    A foreign institutional investor (FII) is a person or a group of people operating or registered in a country that’s not their domicile.

You May Also Like

Hot Definitions
  1. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  2. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  3. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  4. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  5. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  6. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
Trading Center