A structured note is a type of structured product which combines bond investments with derivatives in a single note.
The derivative component is typically much smaller than the bond component. It allows the structured note to achieve capital gains if the underlying assets gain in value over the note’s term.
The bond component provides fixed income through interest paid out as coupons. It balances the capital loss risk of the derivative component.
Structured notes have fixed maturity dates. Structured notes may be distributing and pay out coupons at regular intervals. Alternatively, they may be accruing, with initial capital plus collective capital gains and interest paid out at maturity.
As with other notes, a structured note is guaranteed only by the bank which issues it. You do not own the bonds making up the bond component, nor the assets underlying the derivatives. In the event that the bank which issues a structured note goes bankrupt, you may lose your invested capital.
Buying bonds, stocks and other assets directly and creating your own balanced portfolio is generally preferable to using notes which combine multiple asset classes. The primary reason for this is that when you own actual securities, you do not risk losing all your capital if one bank fails.
As with all structured products, the terms, conditions and makeup of structured notes varies broadly between individual products. It is important to carefully review the terms and conditions before investing in a structured note.
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