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Types of bonds

Loan participation notes (LPNs)

In terms of function and investor risk, LPNs are no different from "normal bonds". In return for the loaned capital (nominal amount), the issuer makes interest payments at regular intervals, and the bond is repaid at par on maturity.

However, unlike normal bonds, LPNs involve a tripartite relationship: usually, a bank acts as the issuer ("legal issuer") vis-à-vis the investor, but from an economic standpoint, the actual borrower is another company ("economic issuer"). This company indirectly obtains debt capital in the marketplace via the legal issuer. The bank (legal issuer) issues LPNs for the sole purpose of financing the loan it has granted to the company (economic issuer).

The legal issuer receives the economic issuer's interest and capital payments and guarantees that it will pass these payment flows on to the investor.