Suppose Ford Motor Company issues a 5% bond with a stipulation that if a national index of SUV sales drops by 10%,then Ford can decrease the coupon rate to 3%.This security is called a

Question

Quizplus · Accepted Answer

A credit-linked note is a type of hybrid security that is linked to the credit quality of a particular issuer or reference entity. In this case, the reference entity is the sales of SUVs in the national index. The stipulation allows Ford to decrease the coupon rate to 3% if the sales drop by 10%, which provides a form of credit protection to bondholders. Therefore, this security is called a credit-linked note. It is not a credit option, credit swap, or credit default swap because those are different types of financial instruments with different characteristics.

Suppose Ford Motor Company Issues a 5% Bond with a Stipulation