Common Terms for Structured Investments
Accelerator
An accelerated return note is a type of structured product that offers a potentially higher return that is linked to the performance of a specific reference index or stock at a predetermined rate. An example could include a 150% participation on the worst performing index out of SPY, NDX, RUT.
Barrier
A barrier on a structured note is a predetermined level or percentage of movement that protects an investor from losing their original investment. Barriers are also known as soft protection, cliff loss, trigger, and contingent buffers.
If the underlier drops below the barrier level, the investor will be exposed to the underlier's return on a 1 to 1 basis. For example, if a note has a barrier of 10% and the reference asset has declined 5% at maturity, the investor receives their full principal back. However, if the reference has declined 50%, the investor loses 50%.
Buffer
A buffer in a structured note is a cushion that protects investors from potential losses by absorbing a predetermined percentage of negative returns from an underlying asset. The most common type of buffer is a "hard" buffer, which provides a fixed percentage of downside protection.
For example, if a note has a 10% buffer and the reference asset declines 5%, the investor receives their full principal back. However, if the reference declines 50%, the investor loses 40%.
CD
A certificate of deposit (CD) is a financial instrument that can be part of a structured product.
Contingent Coupon
A type of coupon offered on some income products, where the investor receives a coupon if a specified contingency is satisfied. For example, a structured note's coupon may be contingent on the return of an underlier being at or above a coupon barrier level. If the underlier doesn't recover to that level on a coupon payment date, a coupon will not be paid.
CUSIP
A CUSIP, or Committee on Uniform Securities Identification Procedures, number is a unique nine-digit alphanumeric code that identifies a financial instrument and its issuer or borrower in the US and Canada. CUSIPs are used for a wide range of securities, including stocks, bonds, options, derivatives, hedge funds, and syndicated loans. They are similar to serial numbers and help to facilitate the clearance and settlement of securities.
Dual Directional
A dual directional structured note, also known as an absolute return note or absolute performance note, allows investors to profit from the positive performance of an underlier, and to a limited extent from negative performance. The note's
performance is based on the underlier's return over the term of the note. If the underlier's return is positive at maturity, the investor may receive a positive return. However, if the return is negative but within a certain range, the negative performance can become positive at maturity. If the gains or losses are outside of that range, the investor's gains may be capped on the upside and they could lose some or all of their investment on the downside. The terms of the note can determine the extent to which the investor can participate in the underlier's upside performance. This participation can be "point-to-point" (1-to-1 upside), "accelerated" (greater than 1-to-1 upside), or "partial" (less than 1-to-1 upside). The negative performance is usually capped at the note's protection level.
Duration/Term
The time period over which a structured note is held. Maturities can range from 6 months on up, with most being between 12-60 months.
Fixed Coupon
A type of coupon offered on some income products, where the investor receives fixed coupon payments on scheduled dates, often monthly or quarterly. The annualized yield, or maximum amount of potential return, is paid out in the form of coupons.
Geared Buffer
A geared buffer, also known as a levered buffer, fading buffer, or geared airbag, is a type of buffer in a structured note that absorbs a fixed percentage of an underlier's decline. Once the buffer is reached, losses are leveraged to the market, meaning that losses are greater than one-to-one with the market's return beyond the buffer.
For example, if the underlier declines below the buffer level, the investor may lose at a rate greater than 1% for each 1% that the underlier is below the buffer level.
A geared buffer typically leverages at a rate that will equal a 100% loss if the underlier were to go to a zero value.
For example, if the geared buffer is at 20%, the losses after 20% would be leveraged at 125%.
Memory Coupon
A memory coupon is an optional feature that can be added to a structured note to provide an extra safety net for coupon payments. If a coupon payment is missed, the memory feature can "remember" the missed coupon and add it to the next observation date. If the note's underlier is above the coupon trigger on the next observation date, all missed coupons will be paid.
No Call Period
The period following Trade Date during which callable structured products are not eligible to be called for redemption.
One Star
The one-star feature is an enhancement for multi-asset structured products. It differs from other structured products in that it allows for full capital repayment even if a barrier is breached, as long as one of the underlying assets is above a certain level. This level is usually the initial strike level.
Participation Rate
The participation rate refers to the rate used in an accelerated return structured product. A participation rate is a fixed percentage that determines how much of an increase in the value of a reference asset or index is paid to investors of a structured product. It's a predetermined rate that's used to calculate the return at maturity when a product reaches maturity.
Phantom Income
Phantom income, also known as "phantom revenue", is income that is taxable but not received in cash. It is commonly experienced with principally protected structured product. The difference between the purchase price and the matured value is the “Original Issued Discount” or OID. On each note the IRS states the amount that must be realized as phantom income as outlined in publication 1212. As phantom income is paid, the cost basis of a structured note will decrease proportionately.
PPN
PPN stands for Principal Protected Note, which is a type of structured product that guarantees the return of the principal amount invested if the note is held until maturity. PPNs are also known as Guaranteed Linked Notes. This guarantee is limited to the credit worthiness of the bank that writes the PPN. A principally protected certificate of deposit, or PPCD would carry additional protection beyond the credit worthiness of the bank.
Snowball Note
A snowball on a structured note, also known as a Snowball Coupon Note. is a structured product that pays investors a one-time coupon if certain conditions are met:
The underlying asset, such as a stock, commodity, or index, performs within a predetermined range at either an early call date or at maturity.
Structured Note
A wrapper that combines a zero-coupon bond with options or derivative products. For example, a structured note might combine a zero-coupon bond with a call option linked to an index, such as the S&P 500. The investor's return is then linked to the value of the underlying asset. Structured notes can offer downside protection, amplified upside returns, and the potential to outperform passive benchmarks.
Underliers
The underlying asset, or reference asset, of a structured product is what determines the note's return. The underlying asset can be a stock, commodity, currency, index, or interest rate.
For example, a structured note could be linked to the price of oil, the S&P 500 Index, or a basket of stocks. The note's performance is based on the price return of the underlying asset, excluding dividends.
Worst of
Sometimes, structured products may have more than one underlying asset. For example, a "worst-of" structured note considers multiple assets and uses the worst performing one at maturity to determine the note's payoff. This structure can improve payoff terms but also add risk.
Zero Coupon Bond
A bond that doesn't pay interest during its life, but is instead sold at a discount and redeemed at face value on a set date, called the maturity date. The difference between the purchase price and the face value is the investor's return. Zero-coupon bonds are also known as STRIPS.