Introduction
As a new investor, you may come across a dartboard of jargon comprising financial terms or investing strategies. These terms may cause you to make the wrong decision with your choice of investment portfolios.
Coming across terms like return on investments, equity, bonds, mortgages or mutual funds can be a spin around your intuition about which moves are right and which aren’t.
That need not be the case anymore with our blog titled Phoenix auto callable notes wherein we aim to cover the basics in addition to helping you get a deeper understanding of how things work!
What Are Structured Notes- Meaning And Conceptualization Explained
Structured notes are hybrid investment products that have a mix of debt and equity. The debt component can be a promissory note issued by a wealth manager, product distributor, or investment banker in the name of the investor. The debt acts as a downside protection cover against the investor’s initial capital investment or principal money. The debt is linked to a derivative component that can be an asset or investment. The asset allocation comprises stocks, shares, a basket of fixed-income securities, or high-paying currencies, to name a few.
While the debt protects the investment capital, the upside gains of the notes depend on the performance of the underlying assets the notes have been linked to. Investors can customize the notes according to the level of risk tolerance they can handle under their belt after a thorough risk profiling has been done by the product issuer on the investor.
Terms like “index, LLC, “spdji, poor’s®, “bank “dow jones, “and s&p index may sound new to investors who have started their journey afresh with structured notes and they must have awareness of the terms used to own additional responsibilities on their investment portfolios. In other words, it is you as the investor who can owe your financial responsibility.
What Are Autocallable Notes- Meaning And Conceptualization Explained
Auto-callable notes are short-term to medium-term investments wherein the notes are linked to equity assets like stocks, commodities, futures, options, and currencies to name a few.
The notes have a special auto-call feature that is embedded into their structures. The product issuer monitors the performance of the underlying assets in congruence with certain pre-set conditions that the notes have.
The initial purchase points of these assets are compared against the current values of them and the assessments are done at certain observation periods covering the term of the investment. We can also call them specific observation days. The coupons start accumulating after the first interest observation date and you can register this entry on your cheat sheet.
The value of assets must go above or at least remain on par with initial threshold limits also known as barrier limits. Once assets reach their sale points or desired limits, the notes get auto-called. In other words, the autocallable notes are redeemed wherein the principal amount is given away to the investors in full.
The assets also earn coupon payouts based on the performance of the underlying assets the auto callables are linked to. The coupon payouts are the investment plus or extra earnings the investor receives over and above his initial level of investment.
The product issuers do not wait until the exact maturity period of the notes. Once the final prices go above the initial strike values of the underlying assets, the notes are auto-called or automatically redeemed. Therefore, the investors get back their capital amount and coupons even before the maturity of their investment notes.
The notes may not be auto-called if sale points or final prices do not reach initial barrier limits as such. The lists as stated in the offering may be read by investors before making an investment decision in favor of auto-callable notes. This is because the notes may lead to loss of capital if the value of assets fails to touch down initial barrier limits or specifications that are applicable to these notes.
The coupon payments will not be paid if the underlying assets fall below autocall or coupon barrier limits. As a well-informed investor, you can refer to the pricing supplement that shows the initial investment plan along with when the autocall redemption event is going to take place with the relevant valuation dates if any.
In addition to the above, the offer document can also discuss the suitability of the investors wanting to make an investment claim with the product.
In a nutshell, the relevant purpose of this trading instrument must be carefully evaluated from the investing perspective. Newbie investors can approach a financial advisor or related affiliates to discuss how much the notes can earn by the final valuation dates.
Phoenix Auto Callable Notes- Meaning and Conceptualization Explained
Phoenix auto-callable notes belong to one of the variants of autocallable notes wherein the investors receive their coupon payments even before the termination of autocallable notes.
There are two types of Phoenix auto-callable notes:
- Phoenix autocallable notes (without memory feature) and
- Phoenix autocallable notes (with memory feature)
Let us have an overview of each of the above:
- Phoenix Auto Callable Notes (Without Memory Feature)
Two components work hand-in-hand concerning a Phoenix autocallable note. The autocall barrier is the first one and the coupon barrier is the other one.
You must understand that the coupon barrier always measures lower than the autocall barrier. Therefore, when the product issuer gauges the underlying prices of the assets vis-a-vis their initial prices, the assets may fall lower than the autocall but may reach the coupon barrier limits. Still, the coupon payments are made to the investor.
However, this is a Phoenix note without a memory feature. Therefore, coupon payments are made to investors only once each year after the asset values are determined during that year. In other words, the interest payment will be paid only once during the year. The principal amount invested gets paid out once the notes get auto-called.
- Phoenix Auto Callable Notes (With Memory Feature)
Phoenix autocallable notes with a memory feature behave the same as the autocallable notes without the memory feature except for this particular point of difference that sets both of them apart.
In a Phoenix note with a memory feature, every missed coupon payment gets recorded. And, investors can redeem all of their coupon payments at once.
The performance of underlying assets may be gauged once during the year or via two quarters. However, as and when the assets stand above the coupon barriers, the payouts are made to investors.
Here, the advantage is you get multiple coupon payments under a memory feature while the remittance of coupons under a note without a memory feature happens only once during the year.
The Bottom Line
The performance of underlying assets depends on the product issuer or bank that verifies the investment in the notes vis-a-vis the coupon barrier levels for interest payments to investors. The index prices at the initial and final sale points of assets are monitored periodically that determine auto-call triggers to be initiated for the redemption of auto-callable notes.
Different structures underlie investment products. Getting down to the basic factors of how each investment plan works lies at the sole discretion of the investor. The credit risk and liquidity of independent obligations of asset classes differ from product to product.
The print selection list on assets vis-a-vis liability is done as against a fee done by the Securities and Exchange Commission wherein investors differentiate asset classes like that of an f-class or the kind as done with RBC structured notes.
Therefore, the product details have law-abiding guidelines that investors must be wary about.
