Structured bonds – capital guarantee and even greater possibilities of gain
Structured bonds – is an insured investment linked to stocks, stock funds, indexes, prices of commodities, money market and currencies. This is a long-term and safe investment. You invest your savings – we guarantee that on the redemption date of your bonds you will regain your initial capital invested even though the value of the assets linked with the bond drops down.
Investments to structured bonds
Nordea offers two types of structured bonds: without the risk premium Basic and with the risk premium Extra.
Upon the announcement of commencing the distribution of structured bonds by the bank, investors submit their applications to acquire bonds distributed by the bank. The minimum investment amount, most often in euros, is announced in the description of bonds. After the completion of distribution an actual market value is determined that may differ from the nominal value of bond.
Structured bond without the risk premium (Basic)
The funds entrusted become an alternative to a fixed-term deposit (or zero coupon bond), whereas for a small amount of assets options allowing linking the financial assets entrusted to the stock market indexes or other asset classes (currency rates, prices of commodities) are acquired.
The investor may always sell a bond held before the fixed redemption date, yet then the capital guarantee will not be valid, since the investor may receive both, a bigger or a smaller sum than it was invested. Everything depends on the market situation (rises/drops) in which the linked assets move in the markets.
The bond investment period ranges from 3 to 7 years. A precise term is announced in the description of the structured bond.
1 scheme. Structured bond without the risk premium (Basic)
An important element of the structured bond is a participation coefficient. It shows what return percentage an investor will receive at the time of redemption of a structured bond upon its maturity (in 3–7 years). If an investor chooses a structured bond without the risk surcharge, a smaller participation coefficient is applied. If an investor chooses bonds with the risk premium, a greater participation coefficient is applied.
Example. If a participation coefficient is 30%, whereas the linked financial assets grew in price by 50%, at the end of the bond term (maturity) the client will be paid 50 x 30% = 15% return from the amount invested.
The participation coefficient may be between 70 and 200 per cent.
Structured bond with the risk premium (Extra)
The structure bond with the risk premium is very similar in its nature and management principle to the structured bond without the risk premium. The main difference is an additional risk premium. Most often a 10% risk premium is fixed, what means that an investor willing to gain more than the value of the linked financial assets is likely to increase in the market, will pay a 10% risk premium beforehand. Therefore he selects an investment with a greater participation coefficient. If the financial markets to which the bonds are linked rise, then the investor earns considerably more than what he would have gained if he had invested directly in that financial market. A drawback is that if the financial markets drop down and at maturity the value of the bond is negative, the investor will regain his investments without the risk premium.
2 scheme. Structured bond with the risk premium (Extra)
Having selected the structured bond, an investor may face the following risks:
- Inflation risk – a return earned may be less than the current inflation rate;
- Credit risk – risk associated with the ability of the bond issuer Nordea Bank Finland Plc to redeem an issue of bonds. The Nordea Bank Finland Plc international long-term borrowing rate is: S&P AA- ; Fitch AA-;
- Direct loss risk – a probability for an investor to regain less than was invested. This risk emerges when an investor seeks to sell the bonds held before their maturity.