Why might an investor choose a Credit-Linked Note (CLN)?

An investor might choose a Credit-Linked Note (CLN) primarily to gain higher coupon payments for bearing credit risk. CLNs are structured financial instruments that combine debt with a credit derivative. When an investor purchases a CLN, they are essentially taking on the credit risk associated with a particular reference entity. In exchange for this increased risk, investors typically receive a higher interest rate or coupon payment compared to traditional fixed-income securities, such as government bonds or corporate bonds without credit linkage.

The appeal lies in the potential for greater yield; as investors accept a degree of credit risk, they demand compensation for that risk, which manifests in the form of higher coupon payments. This structure allows investors seeking higher returns to strategically gain exposure to credit risk while receiving a premium for that exposure.

Other options present alternatives that do not align with the primary motivations behind investing in CLNs. For instance, minimizing credit risk or avoiding traditional bonds does not align with the primary intention of engaging with a CLN, which inherently involves accepting credit risk. Likewise, guaranteed returns do not apply to CLNs since they are subject to the performance of the underlying credit. Therefore, the correct rationale for selecting a CLN is centered on the opportunity for enhanced coupon payments derived from taking on additional credit