An equity-linked note (ELN) is a debt instrument, usually a

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 chemica ...

, that differs from a standard fixed-income security in that the final payout is based on the return of the ''underlying equity'', which can be a single stock, basket of stocks, or an equity index. Equity-linked notes are a type of

structured product A structured product, also known as a market-linked investment, is a pre-packaged structured finance investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies, and to ...

s. Most equity-linked notes are not traded on the secondary market and are designed to be kept to maturity. However, the issuer or arranger of the notes may offer to buy back the notes. Unlike the maturity payout, the buy-back price before maturity may be below the amount invested in first place. Equity-linked notes can be referred to one of the following:

Equity-linked put option

An equity-linked put option (ELPO) is a

composed of a deposit, and a short

put option In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the ''underlying''), at a specified price (the ''strike''), by (or at) a s ...

. The underlying stock, exercise price and maturity date determine the principal and interest of the product. The face value of the product is the exercise price times the trading unit, for example, if the exercise price is $100 and the product is sold at 100 shares per lot, the face value of the product is $10000. The product is sold at a discount, which is the option premium received by selling the put option. Using the example above, if the option premium is $2 (per share), the product is then sold at $9800. On the expiry day, if the stock is trading at or above the exercise price, the option is not exercised and the investor receives the full face value of the product ($10000 in the example). However, if the stock is trading below the exercise price, the investor receives the stock instead.

Principal-guaranteed notes

A principal-guaranteed note (PGN) is a

composed of a

zero-coupon bond A zero coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term ze ...

and a long

option Option or Options may refer to: Computing *Option key, a key on Apple computer keyboards *Option type, a polymorphic data type in programming languages *Command-line option, an optional parameter to a command *OPTIONS, an HTTP request method ...

, which may be a

call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...

. The product is principal-protected, i.e. the investor is guaranteed to receive at least 100% of the original amount. The product is sold at the face value, where the discount on the

is used to buy an option. If the underlying product goes in favour of the investor, the option is exercised to create additional return. Usually, the final payout is the amount invested, plus the gain in the underlying stock or index times a note-specific ''participation rate'', which can be more or less than 100%. For example, if the underlying equity gains 50% during the investment period and the participation rate is 80%, the investor receives 1.40 dollars for each dollar invested. If the equity remains unchanged or declines, the investor still receives one dollar per dollar invested (as long as the issuer does not default). Generally, the participation rate is better in longer maturity notes, since the total amount of interest given up by the investor is higher.

References

External links

Equity-Linked Notes: An IntroductionEquity-Linked Note (ELN) on Amex.comEquity Linked Note Structures article on Financial-edu.com
{{derivatives market Financial markets Equity securities Interest-bearing instruments

Equity-linked put option

Principal-guaranteed notes

See also

References

External links