A structured note is an over the counter derivative with hybrid

security Security is protection from, or resilience against, potential harm (or other unwanted coercive change) caused by others, by restraining the freedom of others to act. Beneficiaries (technically referents) of security may be of persons and social ...

features which combine payoffs from multiple ordinary securities, typically a stock or

bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...

plus a derivative. When the product depends on a credit payoff, it is called a credit-linked note. Since no such security exists outside of the sponsor creating this hybrid, the

creditworthiness A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...

of this structured note depends on the strength of the sponsor. Two typical

use case In software and systems engineering, the phrase use case is a polyseme with two senses: # A usage scenario for a piece of software; often used in the plural to suggest situations where a piece of software may be useful. # A potential scenario ...

s: *A simple example of a structured note would be a five-year bond tied together with an option contract. The addition of the option contract changes the security's risk/return profile to make it more tailored to an investor's comfort zone. This makes it possible to invest in an asset class that would otherwise be considered too risky. *From the investor's point of view, a structured note might look like this: I agree to a three-year contract with a bank. I give the bank $100. The money will be indexed to the

S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...

. In three years, if the S&P has gone up, the bank will pay me $100 ''plus the gain in the S&P''. However, if the S&P has gone down, the bank will pay me back the entire $100 – an advantage known as downside protection. (In reality the downside protection is usually "contingent", i.e. it only applies up to a certain threshold amount. For example, with a threshold of 40%, if the S&P has gone down by more than 40%, the bank will no longer pay me back $100, but instead it will pay me the proportional value indexed to the S&P – e.g. $55 if the S&P has gone down by 45%.UBS Financial Services, ''Structured Products: January products guide.'' (2010))

References

Derivatives (finance) Structured finance es:Notas estructuradas {{Econ-stub

See also

References