Their full potential has yet to be realized.
Fish and Fowl
Today's column is something different. Rather than advance an argument, as this space customarily does, it describes an investment type: structured notes. Normally, I leave investment descriptions to others, assuming that my readers already understand the basics. But structured notes are both obscure and imperfectly served by the standard reference sources.
Structured notes are, in effect, a bond/stock hybrid. (Actually, they can be a bond/anything hybrid, but for simplicity's sake let's restrict ourselves to the common application.) As with a bond, structured notes have a fixed maturity date, they may (or may not) pay coupons, and they repay principal upon maturity. However, the amount of that principal varies, depending upon the behavior of a stock (or stock index, or basket of stocks).
Here's a real-world example.
> A three-year note, tied to Apple's AAPL stock price.
> No yield.
> If Apple's stock is higher at maturity date than when the note was issued, the investor receives 100% of the original principal, plus 110% of Apple's subsequent gain.
> If Apple's stock is lower at maturity date than when the note was issued, but its decline is 25% or less, the investor receives 100% of the original principal.
> If Apple's stock is lower at maturity date than when the note was issued, and its decline proves to be greater than 25%, the investor loses principal in proportion to Apple stock. That is, if Apple's stock price fell 37% during those three years, then the investor would receive 63% of principal on the payout date.