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PRMIA Exam 8006 Topic 5 Question 59 Discussion

Actual exam question for PRMIA's Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition exam
Question #: 59
Topic #: 5
[All Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Questions]

Which of the following statements is true for a Credit Linked Note (CLN)?

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Suggested Answer: D

A CLN is a form of a funded credit derivative. The investors in the note are the protection sellers, and receive the CDS premiums in addition to any risk free rate on their investment. If a default occurs, the money put up by the investors in the CLN is used to make good the party that has brought the protection.

Therefore if a default occurs, the investors in a CLN do not receive their entire investment back, but only what remains after fullfilling their obligations on the credit protection, plus any premiums that might have been earned. In return for this risk, the CLN yields the risk free rate plus the CDS premiums. Only Choice 'd' is correct, all other options are incorrect.


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