Structured Note

A structured note is a debt security that combines traditional fixed-income investments with derivative components to provide customized exposure to different assets, markets, or risk factors. Structured notes offer the potential for enhanced returns, but they also carry higher risks than traditional bonds. They can be tailored to meet specific investment goals, such as gaining exposure to equity indices, currencies, or commodities while offering some protection against losses.

Example

An investor buys a structured note linked to the performance of the S&P 500. The note promises a fixed return unless the index falls below a certain threshold, in which case the investor could lose part of their principal.

Key points

• Combines debt security with derivative features for customized exposure.

• Offers potential for enhanced returns but higher risk than traditional bonds.

• Can be linked to equity indices, currencies, or commodities.

Quick Answers to Curious Questions

What makes structured notes more complex than traditional bonds?

They combine fixed-income features with derivatives, creating a security that depends on the performance of underlying assets like stocks or commodities.

What are the risks associated with structured notes?

They carry market risk, credit risk, and liquidity risk, and investors may lose part of their principal if certain conditions are not met.

Why might an investor choose a structured note over a regular bond?

Structured notes offer the potential for higher returns and customized exposure to specific markets or assets, appealing to investors with particular goals.