Introduction to Structured Notes
In this introduction article we will explore what lies beneath this term ‘structured notes’. A structured note is a product that is frequently offered to international investors, either by banks or by wealth managers. As the name suggests, structured notes consist of several individual financial instruments which, combined together, form a ready ‘over-the-counter’ product.
The following is a broad introduction on the basic characteristics of Structured Notes. It possible however to customize every single note to meet the requirements of a particular audience.
Characteristics:
- Represents a debt obligation of the issuing bank
- Provides exposure to various asset classes via derivatives or options, like:
- Equities
- Commodities
- Indices
- Funds
- ETFs
- Can provide a full or partial capital guarantee
- Tradable on secondary market
Who should consider Structured Notes?
Investors who require the following:
- Above average yields
- (Partial) protection from market fluctuation
- Diversification into new asset classes and markets
- Have a medium term investment horizon of between 3-6 years
What types are common?
- Phoenix Notes are designed to pay a monthly, quarterly or semi-annual coupon as long as the underlying assets do not drop below the coupon barrier. As Phoenix notes, by design, pay out a regular coupon they generally offer a lower yield than an Auto-callable notes, as a result.
- Auto-callable notes differ from Phoenix notes in that they don’t pay a regular coupon. An auto-callable note accumulates the coupon until the it meets the auto-call conditions. In case the note hits the auto-call conditions the note automatically stops, or calls – hence the name “auto-call”, and pays out the accumulated coupon(s) plus the originally capital.
- Capital Protected notes are different to Auto-call and Phoenix notes, which carry an element of capital-risk, as these notes offer full return of capital at maturity, no matter how the underlying assets perform. As a consequence, the potential yield that these types of notes offer is generally much lower than Auto-call and Phoenix notes. The reason for this is that the full capital protection requirement leaves very little capital available to build and include yield-enhancing elements.
This introduction into structured notes is only the first article of a series. You can read our structured notes FAQ here and the advantages and disadvantages of structured notes here. More information can be Shoreline offers regular structured notes to clients via its many partners. If you want to receive regular updates on structured notes, or if you wish to tailor a personal structured note please contact us directly.
