A structured note is a debt security that combines multiple financial products into one, such as a bond and a derivative. The return on a structured note is based on the performance of an underlying asset, index, or group of assets, such as equity indexes, commodities, interest rates, or foreign currencies. The issuer of the note promises to pay a return based on a formula that incorporates the performance of these assets.
Structured notes can be complex and difficult to understand, they may not be very liquid, and they can come with high fees.
Structured notes—and structured products generally—are retail products designed or “structured” to meet specific investment objectives, such as growth, income or risk management. They do so by combining a traditional security, like a bond, with a derivative component.
Importantly, a structured note doesn’t hold an actual underlying portfolio of investments like a mutual fund or exchange-trade fund (ETF) does. Instead, the issuer of the note promises to pay a return based on a formula that incorporates the performance of one or more reference assets.
As the name suggests, structured notes with principal protection are a type of structured product that combines a bond with a derivative component that offers a full or partial return of principal at maturity, regardless of how the underlying assets perform.
These products might have safe-sounding names that include some variant of “principal protection,” “capital guarantee,” “minimum return,” “absolute return” or similar terms, but they’re not risk-free. While structured notes have the potential for higher returns than their reference assets, they also have unique risks, and their terms and features can be significantly different and more complex.
Most structured notes don’t offer any principal protection, meaning that an investor could lose the entire amount invested as a result of the performance of the reference asset or assets to which the notes provide exposure. However, some notes, often referred to as principal protected notes, or PPNs, are designed to provide 100 percent, or full, principal protection if held to maturity. With PPNs, the return of principal is guaranteed by the issuer, in addition to any gains resulting from the formula based on the performance of one or more reference assets. Other structured notes offer only partial principal protection, such as 10 percent.
If you or someone you know has lost funds placed in a Structured Note, contact our Detroit area Securities Law Firm for an evaluation to determine if you have a case against your Stockbroker or Investment Advisor. Call and speak with a securities attorney today, Free.