CMFAS M9A Structured Products question: security with an embedded credit default swap

CMFAS M9AStructured Products

A credit-linked note is a funded credit derivative structured as a security with an embedded credit default swap. Its distinctive feature is that:

A The issuer is fully obligated to repay the debt in full, regardless of whether any credit event has occurred
B On a credit event the issuer need not repay, shifting credit risk to the investor without an insurer
C It is always capital-guaranteed under the Deposit Insurance Scheme up to the insured limit
D It is an equity security that entitles the holder to a share of the issuer's profits

Show the answer and explanation

Answer: B. On a credit event the issuer need not repay, shifting credit risk to the investor without an insurer

A credit-linked note embeds a credit default swap that lets the issuer transfer a specific credit risk to credit investors. If the specified credit event occurs, the issuer is not obligated to repay the debt, so the investor bears that credit risk; this structure eliminates the need for a third-party insurance provider.

Common mistake

Repayment is contingent — the embedded CDS shifts the credit-event risk to the investor rather than guaranteeing the debt.

Practise more M9A Structured Products questions

Exam-style questions with worked answers, then full timed mocks. Free to start.

Start practising →

Study note: Structured Products CMFAS M9Apractice questions & mock exams

CMFAS M9A Structured Products question: security with an embedded credit default swap

Answer: B. On a credit event the issuer need not repay, shifting credit risk to the investor without an insurer

Common mistake

Related CMFAS M9A questions

CMFAS M9A Structured Products question: security with an embedded credit default swap

Answer: B. On a credit event the issuer need not repay, shifting credit risk to the investor without an insurer

Common mistake

Related CMFAS M9A questions