Credit-linked notes

are credit derivatives that combine ordinary fixed-income securities with credit default options

. Like a regular note, a credit-linked note promises periodic interest payments and the repayment of the

principal amount when the note matures. The credit derivative component added to the bond allows the issuer of the note to reduce the principal repayment to investors of the note after a credit default event occurs. The credit default event referred to here refers to a decrease in the credit rating of the assets attached to the note, or a significant decrease in the market price of the notes issued by the issuer, etc.

A standard credit-linked note is a security that

is usually issued by an investment-grade entity with interest payments

and fixed to The maturity structure is similar to that of a pure

bond. However, the performance of a credit-linked note with a maturity value is closely related to the performance of the specific target asset or the issuing entity's assets. Credit-linked notes may

be issued at face value or at less than face value

. It is a financing tool used by borrowers to hedge credit risks. Investors who purchase credit-linked notes can increase the standard return on their assets. Therefore, credit

The issuer of linked notes is the buyer (beneficiary) of credit protection. By issuing credit linked notes, the issuer disperses credit risks and obtains credit protection. The note purchaser is the seller (investor) of credit protection. By purchasing the credit-linked note, he obtains higher interest and at the same time assumes the risk. If no credit event (amp;'()*@?'-*) occurs

during the duration of the credit-linked note, then the redemption value of the note

on the maturity date of the note (='('7A*)0-85,;') will be paid to investors

. If a credit event occurs, the value paid to investors on the maturity date of the note will be lower than the face value, and investors may lose their principal. Therefore, credit-linked notes are suitable for investors who can bear the risks of individual companies and understand the financial credit status of the target company. Investors should also understand whether credit union notes are suitable for their personal investment strategy and financial situation before making investment decisions.

Investment-grade entities can protect against credit risk in their operations by issuing credit-linked notes

. For example: a bank that issues credit cards

in order to reduce the credit risk of credit card loans,

issues a #-year credit linkage note. The bank's credit rating is BB, the face value of the note is C"", and the coupon rate is !D EF (usually this coupon rate is higher than that of traditional bonds) coupon

rate). The terms of the credit-linked note stipulate that if the proportion of bad debts on the credit card loan exceeds C"F, the note will be repaid at $EF of the face value. The value of the target asset is due to the credit card loan. The debt generated by bad debts has declined, so the bank that issued the credit card redeems the note according to the face value minus the target debt value. As can be seen from the above example,

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When a bank issues a credit-linked note, it actually purchases a credit option. The cost of the credit option is interest

higher than the general bond interest rate. When a specific credit event occurs, the bank exercises the option to reduce the risk encountered; if the bad debt loss is small, the bank does not exercise the option and only loses the cost of the option. >