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How they work:
Simplicity itself. A protection or guarantee is generally provided by a major bank. An investment linked to an asset class, e.g. FTSE 100 and S&P, provided the assets do not fall by more than 50% from the "strike price", the investor will have a guarantee that they will receive their original investment back (sometimes with a deduction of a small establishment fee). Each anniversary the investment is reviewed, if the assets are at a higher price than the "strike price" the investment matures and pays out the coupon, and the return of the original investment. If the prices are not higher it rolls onto the next year, until the term, and then if the prices are still not higher, and the assets have not fallen by 50%, the investors receive back their original capital.
Conclusion:
There are numerous variances of the above, notes can offer coupons in excess of 32% per annum, down to around 5% per annum, some review quarterly others annually. Remember these are "snowballs" so if it does not call in year one, the 32% would roll onto year two, if it calls then the investor receives 64% plus a return of the original investment. Notes offer investors some degree of protection on the downside, whilst providing attractive returns. The risks, taking out the potential of the failure of an issuer, are that if the asset class falls in value by 50%, then the investor could lose capital. Plus if the note does not mature early, the investor will only receive back their original investment.
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