Textbook Notes (367,936)
Canada (161,516)
RSM230H1 (34)
Chapter 24

CSC_Chapter 24 Structured Products.pdf

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Rotman Commerce
Laurence Booth

Chapter 24: Structured Products December-13-11 2:23 AM “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). Principal-Protected Notes ○ 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
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