A credit linked note (CLN) whose redemption and coupon payments are linked to a single default event and also depend on the level at which current CDS spreads are trading. The notional of the note is multiplied by a leverage factor in order to determine the leverage notional. This note is subject to two types of risks: default risk and spread risk. This means the payoff, whether there is default or not, is sensitive to any movement in the CDS spread. The note or bond pays an enhanced coupon to the holder (the protection buyer) for bearing the risk of a single reference entity/ obligation.
Leveraged CLNs (leveraged credit linked notes or LCLNs) come into two types: non-recourse leveraged credit linked notes (non-recourse leveraged CLNs or non-recourse LCLNs) and recourse leveraged credit linked notes (recourse leveraged CLNs or recourse LCLNs).
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