A Credit-Linked Note (CLN) is a type of structured financial instrument that combines elements of debt and credit derivatives. It typically involves the following features: 1. **Debt Instrument**: At its core, a CLN is a debt security. Investors purchase it and receive interest payments, much like a traditional bond. 2. **Credit Risk**: The return of principal and interest payments is linked to the credit performance of a specified reference entity (often a corporation or a sovereign).
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A funded note whose coupons or principal depend on specified credit events of a reference entity or portfolio. In a simple structure, the investor supplies principal and receives enhanced coupon for economically selling credit protection; a reference default reduces principal repayment. The investor may also face the note issuer's own credit risk. This is not automatically the same exposure as directly holding the reference borrower's bond.