What’s Ahead:
- Structured Note Payoffs can potentially turn traditional equity returns into an income stream
- Contingent Income is a type of Structured Note Payoff that can generate interest above traditional bond yields
- Investors seeking to increase portfolio yield or more consistent positive return outcomes tend to appreciate this Note Payoff type
Market Exposure with Yield Enhancement
If you’re interested in generating a potentially high yielding income stream, then Contingent Income Notes, one type of Structured Note payoff, can convert equity returns into income across a range of market environments.
But first, a couple basics:
- Structured Notes are like a hybrid between a stock and a bond. Although they are technically bonds, their market value typically derives from the return of a stock or index, called the Underlier.
- The Structured Note has performance terms that adjust the return of the Underlier to determine the Structured Note’s return. Those adjustments are commonly in the form of protection against negative returns and enhancement of positive returns.
What Differentiates Contingent Income Payoff Notes
Contingent Income Notes are a type of investment that lets you potentially earn positive returns, up to a maximum amount called the Annualized Yield. Similar to a bond, the Annualized Yield is paid in the form of Coupons on scheduled Coupon Payment Dates that are often monthly or quarterly.
On Coupon Payment Dates, the Coupon is paid if the Underlier’s return is above a low-water mark called the Coupon Barrier Level, which is often set well below the Underlier’s price at issuance. This allows the Contingent Income Note to generate positive returns when the Underlier is experiencing mild to moderate losses.
However, when the Underlier’s return is below the Coupon Barrier Level, the Coupon will not be paid. Also, if the Underlier’s positive return is above the Annualized Yield, the Structured Note’s return would not exceed the Annualized Yield.
The table below shows how Contingent Income Notes modify the Underlier’s return:
| Underlier Return | Coupon Paid |
|---|---|
| Above Coupon Barrier Level | Yes |
| Below Coupon Barrier Level | No |
The following chart can be used to show how Contingent Income Notes pay their Annualized Yield in different return scenarios for the Underlier:
Contingent Income Notes may be a good option to generate a positive return across a wider variety of market environments. It’s most effective in mildly positive or mildly negative market scenarios. For more information on choosing note types, we recommend reading our “Choosing a Payoff Type” guide.
By understanding how Contingent Income Notes work, you can potentially increase returns in negative market conditions, and produce a greater return on your investment than holding the Underlier in the traditional way.
Please see our other important disclosures.
