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A Principal protected note (PPN) is an investment contract with a guaranteed
rate of return In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest payments, coupons, c ...
of at least the amount invested, and a possible gain. Although traditional
fixed income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...
investments such as guaranteed investment certificates (GICs) and bonds provide investment security with little or no risk of capital loss, they provide modest returns. While stocks have the potential to deliver substantial returns, they do so at much greater risk. Throughout the unpredictable and volatile market conditions that characterised the late 1990s and early 2000s, investors increasingly sought out new approaches to investing that offered both security and potential growth. Principal protected notes (PPNs) were introduced to the North American financial marketplace at that time. Part of the
structured product A structured product, also known as a market-linked investment, is a pre-packaged structured finance investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies, and to ...
s category, principal protected notes (also known as Guaranteed Linked Notes), can be linked to a broad range of underlying investments. These investments include indexes,
mutual funds A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
, baskets of mutual funds, baskets of
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
s and even alternative offerings such as
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
s. At the heart of a PPN is a guarantee. Typically, PPNs guarantee 100% of invested capital, as long as the note is held to maturity. That means, regardless of market conditions, investors receive back all money they invested. In other words, at maturity, payout on the Note is the original principal plus any appreciation from the underlying assets (typically a mutual fund or group of funds, an index or basket of equities, and sometimes hedge funds or even commodities). Principal protected notes may offer an array of benefits such as: * 100% principal protection * high growth potential * enhanced income potential * weekly liquidity * the opportunity to invest in a broad range of investments * potential for leveraged returns * capital protection regardless of what happens in the markets Principal protected notes may offer disadvantages such as: * opaque fee structure based on variables over the term of the investment * payment only at maturation * underlying investments that the average investor has no hope of understanding * no prospectus, lack of information as to full details of underlying investment * custom design causes difficulty in evaluating PPN vs. other PPNs or conventional investments * lack of data showing how this type of investment has performed historically * possibility of failure of underlying investments, resulting in loss of principal despite guarantees


Example

A common type of PPN is the stock plus option type. Its return equals PPN_T=100+A(S_T-K)^+ at maturity for underlying call options. Where A is a multiplication factor set in the contract, S_T is the stock price at maturity, and K is the option's
strike price In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set ...
.


See also

Structured product A structured product, also known as a market-linked investment, is a pre-packaged structured finance investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies, and to ...


External links


Advisors Asset Management
- A public website that describes structured products and unit investment trusts and provides access to these investments.
Structured Investments
- A good explanation many PPN factors, including the typical combination of zero coupon bonds with index options.
The Structured Product LLC
- A company focused exclusively on structured products, designed to educate investors as well as investment professionals on the benefits and risks of structured investments.
UBS Structured Investments
- A website that provides educational materials related to principally-protected notes and other structured investments as well as details on issuances of UBS Structured Investments.


References

{{Reflist Principal protected notes Interest-bearing instruments