Chapter 10.11 Flashcards Preview

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Flashcards in Chapter 10.11 Deck (15):

Structured Products

Securities derived or based on a single security, a basket of securities, an index, a commodity, a debt security, and/or a foreign currency. Some of these products offer full protection of principal invested, whereas others offer limited or no protection of the principal


Reverse exchangeable securities

Commonly called "reverse convertibles", are popular structured products with retail investors, due in large part to the high yields that they offer.
-Firms are required to ensure that their RR's understand the risks, terms and costs associated with these products , and that they perform an adequate suitability analysis before recommending them to any customer.
-Reverse convertibles are structured short-term loans which are linked to an underlying stock. They pay a coupon, but are NOT PRINCIPAL PROTECTED.


What happens at maturity of reverse Convertibles?

-If the stock has increased, holders receive cash equal to the principal plus a percentage of the increase in value
-If the stock has decreased, holders will receive shares of the stock based on a predetermined exchange ratio.


RR's should discuss what before the customer purchases Reverse Convertibles?

-How the product works
-The fact that the principal value of the investment is not guaranteed and the customer might suffer a loss on the investment
-The ability of an investor to sell the product prior to maturity and the potential sales price may depend on the willingness of the issuer or another party to maintain a secondary market
-If applicable, the fact that the firm has published its own research reports regarding the reference asset, the consent of that research, and how the research is or is not relevant to a recommendation to purchase or sell the reverse convertible.


Principal Protected Notes

Have one pay-off at maturity made up of the original principal plus any increases in the net asset value of the note, less any fees. If the net asset value declines, the principal is guaranteed to be repaid to the investor at maturity. A principal-protected note is an engineered or synthetic bond. It basically is the purchase of a risky investment combined with downside protection


Principal Protected Notes characteristics

-Made up of a combination of underlying assets and other derivatives. The underlying assets can include stocks, bonds, index funds, mutual funds, and commodities.
-Principal is guaranteed by the issuer of the note, generally a bank, therefore the financial strength of the issuer is extremely important.
-Have a face value
-Have a term maturity and are expected to be held to maturity
-No guaranteed coupon payment
-Generally have one pay-off at maturity made up of the original principal plus any increases in the net asset value of the note less any fees.


Principal Protected notes are guaranteed by banks, therefore:

Bank borrowing will be involved and interest on such borrowing is tied to LIBOR


Asset Return Obligation Securities(ASTROS)

Principal protected, index linked notes that pay no interest payment and are not redeemable prior to maturity. At maturity, the holder is entitled to receive a payment based on the percentage change in the index less an adjustment factor plus the principal amount invested


Step-up Notes

Are structured notes where the coupon rate increases over time.


Single range notes

Provide a variable interest rate which is measured to a specific index


Fixed rate knock-out notes

Provide a fixed interest rate if the index it is measured against stay above a certain level. If the index falls below that level, the interest payment is not made for that period.


Hybrid Knock-out Notes

Generally measure against two indices


Pension Income Stream Products

Products where retired employees receiving a pension are offered a "lump-sum" of money now if they "sell" all or some of their future pension payments to a "Factoring Company" or "Pension advance company". The lump-sum is typically less than the value of the total payments the retired person would otherwise receive.


Parties involved with Pension income stream products

-The pensioner who sells the rights to his/her future pension income payments
-The investor who buys the rights by paying an up-front lump sum and
-A "middle man" who facilitates the transaction, known as a "Factoring or Pension advance company"


What is required if structured products are to be purchased in a discretionary account of a customer?

Prior written approval from the customer.