Credit and catastrophe derivatives involve a liquidity risk. Often such instruments
cannot be sold before the end of their term, because there is no market for them.
Credit bonds securitise the risks and transfer them to third parties as credit-linked
notes, collateralised debt obligations and asset-backed securities. As a result, the
buyer takes on the risk associated with a loan portfolio.
CLN are bonds whose redemption and interest payments depend on the performance
of a specific underlying or benchmark portfolio (e.g. loan, bond).
Look closely at the creditworthiness of the debtor to which the CLN is linked, as the
CLN can end up being valueless if a credit event occurs. There is an issuer risk, i.e. a
credit risk of the issuing bank, just as with structured products. The secondary market
for CLN is highly illiquid, and you should therefore assume that you will not be
able to sell one before the end of its term.
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