Chapter 24: Structured Products
“Guarantees,” Index-Linked GIC’s & Principal Protected Notes ( PPN’s)
○ Invest without the risk of losing money: worst-case scenario is return of principal after 5 or more years.
○ Limited upside potential:
If markets perform well, performance is capped < market return.
Use zero coupon bonds & derivatives to alter the performance profile of the underlying asset
○ Downside protection
Opportunity cost: If markets perform badly, funds are locked in for the remaining term to maturity with repayment of
principal (no inflation or interest adjustment)
Credit risk. Principal protection is underwritten by issuing bank &/or insurance co. Guarantee is only as strong as the
financial company providing it (AIG).
○ A debt-like instrument with a maturity date. Issuer agrees to repay investors the amount originally invested plus interest
The interest rate is tied to the performance of some underlying asset
○ PPNs guarantee only the return of the principal, and although issued by chartered banks are not protected under the CDIC
○ PPNs are not issued under prospectus and are not considered securities
○ Three main types of PPNs:
i. Index-linked notes
□ Certificates usually offered in three-year to five-year terms by all major banks
□ Non-transferrable and cannot be redeemed prior to maturity
ii. Mutual fund linked notes
□ Derive their return from an underlying set of mutual funds and have a longer term of maturity (six to eight years)
□ Some issuers maintain a secondary market for the products after issuance