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Structured Notes Structured Notes contd..

This “derivative” component can affect the


Structured notes are hybrid investments that redemption value and stated maturity of the
have components of straight debt instruments note. In addition, most structured notes
contain embedded options in the form of
and derivatives combined into one structure. caps, floors, or call features. Structured notes
Rather than paying a straight fixed or floating vary by their underlying asset – they may be
coupons, these instruments’ interest linked to a group of mutual funds, hedge
funds, an equity index or group of indices, or
payments are tied to indices, rates or other a basket of selected stocks – and usually pay
underlying assets. interest based on an increase (or decrease)
in the underlying asset.

Structured Notes contd.. Structured Notes contd..

• Structured Notes are investment vehicles Most bonds offer a fixed rate of interest. But the
performance of a Structured Note is derived from
issued as either registered securities, non- the performance of a selected underlying asset,
registered notes, or as certificates of and the interest payment is linked to performance
deposit. Registered securities are led with of that asset. Therefore returns can be variable.
the SEC/SEBI as medium term notes. Underlying assets can include:
– One or more equity indices
• Structured Notes are issued by domestic and – Individual stocks or Exchange Traded Funds
foreign banks to help fund their lending – Commodities
programs. – Foreign currency

Uses of Structured Notes Risks in Structured Notes


• To mitigate the risks to a portfolio of a • Credit - The risk that the issuer’s credit profile will
deteriorate, resulting in credit downgrades from
systemic shock ratings agencies (which may impact the market
• To expose portfolios to asset classes or value) and, in some instances, default on interest
payments and/or principal repayments.
markets in which investors can not directly
• Liquidity - Liquidity may be low because issues
invest due to investment mandates and usually do not trade on stock exchanges, but are
regulatory restrictions bought and sold “over the counter.” This can
decrease liquidity, but financial institutions try to
• When investors find it difficult to utilize maintain an active market. Although a secondary
derivatives overtly in their portfolios. market is often available, the notes are generally
considered a buy-and-hold investment.

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Risks in Structured Notes contd.. Suitability of SN
• Market Risk - The risk that little or no interest • Would like the potential to earn higher
may be payable over the life of the note as returns, while enjoying the comfort and
returns are based on the performance of the security of having their principal
underlying market index or asset.
guaranteed but understand that no
• Reinvestment - The risk of a lower interest
interest or yield may be payable;
rate environment at the time interest
payments are received or an investment • Are long term/buy-and-hold investors
matures and, as a result, reinvesting in lower- who will not require their investment
yielding products. returned for period cash flow;

Suitability of SN contd… Principal Protected Notes


• Are seeking a low cost way to participate in • offer 100% principal protection. Performance can
the market since structured notes carry no either be derived from the performance of a
ongoing management fees; selected index, such as the S&P 500 or multiple
• Want to gain market exposure without risking underlying indices (U.S., foreign or both).
their principal, if they hold the notes to
• The underlying assets also could be commodities,
maturity; or,
currency, or single stocks. These notes are for
• Wish to gain exposure to unconventional
assets or strategies that are not available in “buy and hold” investors and have terms ranging
the conventional markets, such as from 2-7 years.
commodities or currencies.

Principal Protected Notes contd.. Principal Protected Notes contd..


• offer a conservative investor the ability to
participate in the upside potential of the
underlying asset without the risk of losing any
principal. The principal protection is guaranteed
by the issuer.
• The Participation Rate for Principal Protected
Notes, while usually between 75% and 100%, can
be more or less, depending on the structure.
• can be created to suit the needs of investors,
regardless of their expectations for market
performance – bull, bear or in-between.

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Booster-Plus Notes Booster-Plus Notes contd..
• Booster-Plus Notes are Principal Protected Notes
that may be appropriate for investors caught in
very uncertain markets. The Booster Note works
well in a bull market, but also performs well in a
at to bearish market.
• Booster Notes typically offer an above average
return up to a certain barrier on the upside while
also providing a limited return based upon the
downside performance.

Buffered Notes Buffered Notes contd..

• Unlike Principal Protected Notes, Buffered • A Buffered Note typically offers increased upside
potential versus the more traditional Principal
Notes offer a limited amount of downside Protected Note as determined by the closing prices
protection. of the associated index, commodity, currency or
• For example, a Buffered Note may protect basket of stocks. The Participation Rate for a
Buffered Note is typically between 100% - 150%
the investor for the first 25% of erosion of on the upside and one-for-one exposure after the
the underlying asset; any decline in value first 25% decline on the downside.
beyond that is not protected. • Buffered Notes are appropriate for those with bull
market expectations – from slightly bullish to fully
bullish.

Buffered Notes contd.. Range Notes


Range notes (also called accrual notes) accrue
interest daily at a set coupon which is tied to an
index. Most range notes have two coupon levels;
the higher accrual rate is for the period that the
index remains within a designated range, the lower
rate is used during periods that the index falls
outside the range. This lower level may be zero.
Most range notes reference the index daily such
that interest may accrue at 7% on one day and at
2% on the following day, if the underlying index
crosses in and out of the range.

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