About Structured Notes


About Structured Notes

 

Structured notes are now being considered by a wide variety of individual investors.

 
Structured Notes / Auto-Calls  have three main elements:,The Guarantee or Protection, The Coupon & the asset it is based upon, The Term
 
The Guarantee or Protection:
If clients are looking for protection of their principle investment they should look for the 100% guaranteed products, these are not available all of the time and the potential upside is lower than the more popular  Structured Capital at Risk Products.
Even the at risk structured notes offer 100% capital guarantee, provided the assets the note is linked to does not fall in value by more than say 50%. Thus an investor has to weigh up what he considers the likelihood of say the FTSE 100 falling say from present day 5600 to below 2800.
 
Many of the notes we offer provide what we term as European Protection, this means that the asset only has to be above the 50% value at the end of the term. Thus in this case the FTSE 100 could fall below 2800, and provided it has recovered to over 2800 by the end of the term the 100% capital protection remains.
 
The second issue with the guarantee or protection is the security of the issuer. So for example if the issuer, or institution offering the guarantee is say Royal Bank of Scotland, then as that bank is majority owned by the UK Government then the reality is that we have to feel comfortable that the UK government will meet any commitments.
 
The Coupon: 
The coupon or amount of return the investor receives is largely dependent upon the nature of the asset it is related to. Thus, for example, a structured note linked to The FTSE, The S&P 500 and Eurostox, is likely to have a much lower coupon than a structured note linked to the Hang Seng, The NIKKEI and the price of gold. Again a common sense approach is clear, your advisor will be able to provide the history of the assets, and you can make a judged opinion as to whether you perceive that perhaps at this time with gold at $1500.00 per ounce, you believe it will go higher, or perhaps it is as high as it is likely to go. If on the other hand as we look back just a few years, when the FTSE was at 4000, down from over 6000 and the S&P in a similar situation, many investors could see there was little likelihood of them falling by 50%, and a strong likelihood of them being higher at some point over 5 years
 
The Term:
Generally 5 years, occasionally 3 years and sometime just 1 year. However, this is the maximum term, many of the structured notes on offer in the past have matured after one year or less.
How they work:
Simplicity itself. A protection or guarantee is generally provided by a major bank. An investment linked to an asset class, e.g. FTSE 100 and S&P, provided the assets do not fall by more than 50% from the “strike price”, the investor will have a guarantee that they will receive their original investment back (sometimes with a deduction of a small establishment fee). Each anniversary the investment is reviewed, if the assets are at a higher price than the “strike price” the investment matures and pays out the coupon, and the return of the original investment. If the prices are not higher it rolls onto the next year, until the term, and then if the prices are still not higher, and the assets have not fallen by 50%, the investors receive back their original capital.
 
Conclusion:
There are numerous variances of the above, structured notes can offer coupons in excess of 32% per annum, down to around 5% per annum, some review quarterly others annually. Remember these are “snowballs” so if it does not call in year one, the 32% would roll onto year two, if it calls then the investor receives 64% plus a return of the original investment. Notes offer investors some degree of protection on the downside, whilst providing attractive returns. The risks, taking out the potential of the failure of an issuer, are that if the asset class falls in value by 50%, then the investor could lose capital. Plus if the structured note does not mature early, the investor will only receive back their original investment.
 
 
 
WATCH OUR INTRODUCTION TO STRUCTURED PRODUCTS

Copyright © 2011