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The Best of Both Worlds?


There is a product out there called a Structured Deposit (also called equity linked notes) that is a hybrid of both equity securities and fixed income deposits/bonds. It is has the basic structure of a bond with fixed maturity of anything from two weeks to 6 years or more and best of all, it pays a fixed interest or a predefined tier of interests depending on how the underlying shares perform. It is also normally principal guaranteed so the investor can get back the principal amount in a worse case scenario (unless the issuer defaults- which is the worst case scenario).

As with all products, what is the catch? Well, like fixed deposits, if you require the money earlier then, you will have to forgo the interest but unlike fixed deposits, you may lose part of the principal amount too. This is because the principal is guaranteed at the maturity, but if there is a premature withdrawal, the issuer has to close positions in the market resulting in costs and losses through early redemption.

Equity-linked notes are designed to pay a relatively high fixed periodic coupon. This means that the interests are normally paid earlier at fixed timing. The notes return the par value to the investor at maturity as long as the underlying equity remains above a predetermined protection level(to protect the issuer). Institutional and global investors have been active in purchasing equity-linked notes for several years, but it is only recently that it has been widely available to the mass market investor.

The return on equity-linked notes may be determined by a stock index, a basket of stocks, or a single stock (which is not normally the case). Certain types of notes also invests globally to diversify the risks and also buys into various instruments like options to hedge the risks of market fall. So in a nutshell, the 'aggressive' investor reduces the risk of investing in stock market for a lower return while the 'safe' investor takes a bit more risks to invest in equity linked notes which has higher returns than fixed deposits.

Singapore papers has been advertising a Merrill Lynch structured deposit called Jubilee Notes which is available in tranches of S$5000 or US$5000 that pays interests of around 7% for the S$ notes and higher for the US$ notes (maybe because of the falling dollar?). Another product for you to consider and see if it suits you.

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The information contained in this blog is prepared from data believed to be correct and reliable at the time of publication of this report. The authors do not make any guarantee or representation as to the adequacy, accuracy, completeness, reliability of the information contained herein. Neither the authors or any affiliates or related persons shall be liable for any consequences (direct or indirect losses, loss of profits and damages) of any
reliance placed on information provided in the blog.

Shares and financial instruments illustrated in this blog can go down sharply or in certain instruments suffer total loss on the initial investments. Investors are advised to make their own judgment on the information provided and consult their own financial advisors or consultants as to the suitability of the products illustrated to their particular financial needs and objectives before acting on any information contained herein in this blog.