Structured Notes

What are Structured Notes?

A structured note can be considered as one type of debt security wherein the return is linked to the performance of one or more underlying assets (interest rate, commodity prices) or index such as equity index, sector-based equity basket, etc.

Examples of Structured Notes

Below are a few examples of structured notes.

  • One Year Bond with a Call Option on Copper
  • Three Year Bond with a Futures Contract on Crude Oil
  • Two Year Bond with a Put Option on An Index
  • 3 Month Bond with a Forward on Currencies
  • 1 Year Bond with an Interest Rate Swap

Advantages of Structured Notes

Given below are a few examples of how structured notes benefits investors.

Disadvantages of Structured Notes

The points highlighted below to elucidate the disadvantages of these structured notes.

Conclusion

Structured note being a well-structured financial product, tend to give investors the benefit similar to ‘killing two birds with a single stone’ as they tend to get exposure to different products using a single product. They will now gain access to markets that were earlier restricted to only a few well-sophisticated investors, and the common investor would not be able to gain such access.

Moreover, such products offer a great amount of customization and flexibility as the investor can choose to get into a derivative product that he is well aware of after studying the risk-return characteristics, thereby making the right choice after considering his goals and objectives.

Although such structured notes do give the investor the benefit of having to gain through leveraged returns through exposure on derivative products, there are possibilities that the underlying may perform badly, and the investor may experience a significant loss in this regard.

There is, of course, the exposure to significant credit risk if the issuer defaults. Hence it becomes utmost important that one carries out thorough due diligence and ensures one has a proper understanding of such products before venturing out to invest in them.

Recommended Articles

This has been a guide to what is Structured Notes and its definition. Here we discuss a few examples of structured notes along with advantages and disadvantages. You can learn more about financing from the following articles –

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