Introduction to Structured Notes

Structured notes are investment instruments issued in the form of notes. It combines fixed income products and derivative products to create a more innovative type of financial products. The issuer invests a portion of the principal in fixed income products and the remainder in derivative products. The return on structured notes depends on the performance of the underlying assets to which the notes are tied.

When investors buy structured notes, they need to pay an amount of money equal to the face value multiplied by the issue price. The issue price is usually 1 or close to 1.

 

The underlying assets are the investments to which the notes are linked. They can be almost anything, such as stocks, interest rates, indices, etc. Usually, the prospectus of structured notes includes the key terms and definitions of different asset categories. The prices of the underlying assets are the major factor determining the return on the notes.

 

Some structured products have a knock-out feature. A knock-out event occurs when the underlying asset rises/falls to a predetermined knock-out level and may trigger an early redemption.

 

Some structured products have a knock-in feature. A knock-in event occurs when the underlying asset rises/falls to a predetermined knock-in level. After this happens, investors may suffer a loss when the product matures.

 

Contrary to cash settlement, physical delivery refers to the delivery of shares or other assets at a specified strike price.