The CLN buyer has the credit risk of the issue because if there is a downgrade, he would earn a lower return. He also has counterparty risk because the CLN issuer could possibly default on her obligation. There is also correlation risk if the default risks of the CLN issuer and bond issuer are highly correlated. Furthermore, CLNs are often privately traded and illiquid, so CLN investors may have a difficult time redeeming them prior to maturity. The CLN buyer has relatively little exposure to yield curve risk. |
