Credit-linked bonds

A bond where the coupon rate is inversely correlated with the issuer’s credit rating.  If the credit rating of the issuer goes down, the coupon rate goes up.  Conversely, if the credit rating improves, the coupon rate goes down.

While this offers some protection against a credit downgrade of the issuer, the higher required coupon payments may make the financial situation of the issuer worse and possibly increase the probability of default.

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