Structured Notes: Key Concepts. Part 1

The yield on notes is, on average, higher than on bank deposits and bonds, while losses are fully or partially limited.

Structured notes differ from each other. For example, there are notes with coupon payments and notes with yield at the end of the investment term.

Underlying Assets

A structured note is like a construction kit: the contents vary depending on the investor’s needs. It is based on a basket of underlying assets: stocks, indexes, commodities, and currencies. For example, an ETF on the S&P 500 index or a crude oil futures contract WTI. The investor’s income or loss depends on the dynamics of the underlying assets, as well as the parameters of the note itself.

Issuer and Broker / Asset Manager

Issuers of structured notes are financial companies: Goldman Sachs, UBS, Barclays, EFG, Marex, etc. They issue a note created according to the requirements of a broker or asset manager.

The broker/asset manager structures the note, that is, determines the investment terms, target yield, and protective parameters that will protect the investor in case prices of the underlying asset fall.

Barrier Autocallable Notes and Capital Protection Notes with Participation

Barrier Autocallable Notes allow receiving regular coupon payments (e.g. 4% quarterly) and return the original investment amount at maturity or earlier (e.g. in 2 years).

Capital Protection Notes with Participation allow getting a yield from the growth of the underlying assets (e.g. 10% in 3 years) at maturity and return the original investment amount (+1% per annum) at maturity.

The first option is more profitable but also riskier.

Barrier Autocallable Note — coupon payments

For example, 4% per annum is paid quarterly (16% per year). Coupons on notes are not taxed.

The coupon can be:

• guaranteed: payments occur regardless of the underlying assets’ performance,
• contingent: payments depend on the underlying assets’ performance.

The guaranteed coupon is always lower than the contingent one, as there are fewer risks.

Capital Protection Notes with Participation — return on investment with premium

This instrument is more similar to a bank deposit. The yield is lower than a barrier autocallable note, but part of the yield is guaranteed — in most cases, it is 1% per annum in US dollars. This is the protection with a premium.

At the same time, the investor also receives a yield from the growth of the underlying asset. What exactly depends on the participation rate ​​— this parameter determines what share of the yield of the underlying asset is paid to the investor on the note.

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