What Can Linked Bonds Be Used For?

What kind of Linked Bonds do actually exist? Well, there are

 

Each of these linked bonds have one common theme: they link basically anything as underlying to the bond. The proceeds of the bond issue are pledged by the issuers to be used for a specific investment purpose, i.e. invest into the underlying. Therefore the credit view of the issuer has no relevance here. Most linked bonds are issued unsecured and unprotected in the industry.

Linked Bonds – Corporate Bonds Risk

Usually it is important that investors of corporate bonds know how to assess credit risk and its potential payoffs. But as we stressed already, linked bonds derive their value not from the credit worthiness of their issuer, but of the value of the underlying.

A simple example: Issuer Golden Dynamic XXIII Ltd. issues a Portfolio Linked Bond for 10 Million EUR and pledges to invest the proceeds into 400-troy-ounce LBMA Good Delivery gold bars. Safekeeping will be within the Swiss Gold Safe AG bunker in Amsteg inside Mount Gotthard. The issuer has no other purpose, no other business and no other bonds. It should be clear that the risk of the bond is only linked to the value of the gold stored inside the bunker, but not to the issuers credit standing as it is irrelevant. A trustee and additionally an auditor will always monitor the issuer as corporation and in its function as issuer. The stock exchange itself, where the issuer has listed the bonds, ensures through publication of the NAV of the linked bond that all parties involved have public and transparent access to all relevant information.

Linked Bonds – Corporate Bond Interest

Corporate Bond Interest of Linked Bonds means the distribution of value over the initial investment value after depreciation of all other costs and taxes. The distribution follows usually according to an agreement between issuer and investors. It is industry standard to distribute linked bond interest either on request or in regular intervals. This is defined in the prospectus of the linked bond.

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