If direct investments in securities seem complicated and risky, it is worth considering investing in linked bonds. It is an opportunity to gain a relatively high return without the upper limit and lower loss risk due to the nominal capital protection.
Yield from the linked bonds depends on the change of value of the linked assets. Assets linked to the bonds are usually indices of equities of various countries and world regions. Just as with the direct investments and investments in funds, the return from the linked bonds is obtained from growth on equity markets. However, the nominal capital protection is provided in case of the downturn on equity markets.
Examples of Positive and Negative Scenarios with the Linked Bonds:
Bonds usually have a term of 6 years. The initial bond price (1) consists of the nominal value of EUR 1,000 and the risk premium constituting from 5 to 10 per cent of the bond price. The larger the risk premium, the higher the participation rate.
When the equity market goes up during the investment period, the bond value rises as well (please refer to the positive scenario). In the positive scenario, the value of bond is calculated as follows: nominal value + linked asset gains x participation rate (2).
When the equity market falls, the price of bonds will start decreasing, but after some time their value will start to rise. The increase will continue until the initial nominal value is reached in the worst-case scenario at the end of the period (please refer to the negative scenario). In the negative scenario, only the paid nominal value is returned and the risk premium is lost (3).
Nominal Capital Protection
It is ensured that the nominal value of the bonds will be regained even if the value is reduced on the day of maturity of linked assets. Linked bonds are linked to the issuer’s (a participant of the securities market who issues securities in order to attract the funds of investors (investments)) solvency risk. The issuer can become insolvent and unable to fulfil its obligations due to the bankruptcy or in similar cases.
Components of Equity-Linked Bonds
The invested nominal capital is divided into the following components: fixed income investment (a term deposit or zero coupon bonds) and derivative financial instrument (options) allowing linking the financial assets to the equity market indices or other asset classes (exchange rates or commodities market). Moreover, there can be bond premiums applicable. The participation rate depends on the size of the premium.
Fixed Income Investment
A certain part of the nominal capital is invested in the fixed income market so that the protection is provided to the capital on the maturity date. The larger part of the nominal capital is intended to protect, the larger part of the nominal capital is invested in the fixed income instruments.
Derivative Financial Instrument
Derivative financial instruments provide an opportunity to gain benefit in case of the rise of value of the linked assets. After investing in fixed income and deducting the structuring costs, the remaining part of the nominal capital is invested in derivative instruments.
Structuring costs are all bond-related expenses of the issuer: issuing of the bonds, licence, tangible and marketing costs.
Premium is the amount exceeding the subscription price intended for the acquisition of an option. The larger the premium, the higher the participation rate.
If you would like to invest in the linked bonds distributed by the bank, please visit us to receive a free consultation, during which we will introduce you to investment possibilities.
- Open a securities account at any branch of the bank. Opening of the account is free of charge. Make sure to have your ID with you.
- Purchase distributed bonds at a customer service branch.
- Check the emissions of distributed linked bonds provided here.
Sale of Linked Bonds on the Secondary Market
Investors do not have to wait for the maturity date if they want to sell the bonds. Sale and purchase prices of bonds distributed by the bank are calculated every day. If the investment is sold on the secondary market before the maturity date, the secondary market price can exceed or be lower than 100% of the nominal value. It is important to note that the capital protection is applicable only on the maturity date.