Is a debt instrument, usually a bond, that differs from a standard fixed-income security in that the final payout is based on the return of the underlying investment, which can be any type of investment, i.e.Stocks, bonds, mortgages (directly & indirectly), structured investments, commodities (directly & indirectly), exchange traded Futures, any kinds of derivatives (exchange traded & OTC), foreign currency transactions (directly & indirectly) and basically any kind of tradable security.
Even private equity investments can be fully realized through financing by performance linked bonds.
Basically the idea behind a performance linked bond is to link the performance of the bond not to the credit quality of its issuer, but to the performance of an investment, to which the proceeds of the Performance Linked bond issue have been invested into.
Using the proceeds of the Performance Linked bond issue to invest them into a trading account with a bank or broker. The performance of the trading account is then linked through the trading account`s net asset value (NAV) directly with the value of the Performance Linked bond. As it is industry standard for the exchange, where the Performance Linked bond is listed, to publish the NAV of the Performance Linked bond notes amongst other issuer data, any investor has full transparency of the value of the Performance Linked bond at any given valuation interval.
Because any Performance Linked bond is not linked to the issuers credit quality, its market value must always be the net liquidation value of the Performance Linked bonds` underlying investment. As this value is usually calculated through an exchange approved calculation agent and then published through the note listing exchange, price manipulation is virtual impossible and any investor can be assured that the value of the performance linked note always reflect the value of the underlying investments – and only the value of the underlying investments without any speculative pricing or speculative valuation possibilities.
The investor is usually never guaranteed to receive 100% of the original amount invested at maturity, as most issues are unsecured and unprotected. Interest payment may be made in regular intervals, at the request of the issuer or even investor, when the issuer of the Performance Linked Bond agrees to it.
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