Principal Protected Notes (PPN)
A principal protected note (PPN) is a structured product typically issued by a financial institution such as a bank. The payoffs from such a note can be thought of as combining the payoffs of a zero-coupon bond with that of a call option. The exact type of call option can vary (e.g., Vanilla, Asian, Binary) but the investor is guaranteed a return of principal at maturity because the zero-coupon bond component matures at the maturity of the note.
The derivative component of a PPN is linked to the performance of one or more underlying assets (underlier) such as a single stock or basket of stocks; a commodity or basket of commodities; a hedge fund; and a fund of hedge funds. The performance of the underlier is used to determine whether and how much more than the full principal will be paid at maturity - if the option is “in the money”.
PPN's enable prudent investors to safely and confidently diversify into alternative assets - including Cryptocurrency - with principal protection.
What is a Principal Protected Note (PPN)?
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A Principal Protected Note (PPN) is a debt instrument issued by a creditworthy issuer whose return linked to the performance of another investment known as the underlying asset.
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The principal is protected by a direct, unconditional obligation of a creditworthy issuer; usually a Bank.
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PPNs are designed to give the investor a guarantee of principal and often currency protection along with the potential for reasonable returns.
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PPNs are purchased by investors with the intention of exceeding the current GIC rates of return. The returns for PPNs are generally linked to the performance of equities, indices, mutual funds, commodities or alternative investment products.
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Particularly suited for conservative investors seeking a balance between risk and reward in their investment portfolios. These include retirees or those nearing retirement.
Although PPNs have generally coined the title of "risk-free", we believe that our clients deserve full transparency, wanting what's best from them and their investments. Here are the most prominent risks which arise when dealing with protected notes, and how to manage them:
What are the risks?
The Common Variety of Structures and Underlying Assets Found in PPNs:
PPN Principal Protection: Two Guarantee Structures
1. Options Based Strategy -Zero Coupon Bond + Call Option -Call Option is sometimes leveraged to enable higher participation of the Underlying Asset
2. Constant Proportion Portfolio Insurance (CPPI) -Also known as Dynamic Asset Allocation -It varies the weighting of the Underlying Asset and the Zero Coupon Bond based on its current performance. -Uses dynamic hedging to keep the volatility of the underlying basket of securities as low as possible. -And it allows leveraging (Up to 200% in some cases)
