What’s Ahead:
- Contingent Coupon Notes can increase yield potential.
- These Notes can be effective in mildly positive or mildly negative market scenarios.
- As with all Notes, it’s important to understand the trade-offs.
Income Notes have the potential to produce compelling investment income (yield) in a variety of market scenarios. In contrast to Growth Notes, which typically include an enhanced participation rate based on an underlying index’s return, Income Notes can be geared toward more conservative risk tolerances.
Contingent Income Notes are a unique variation on the vanilla Income Note because periodic coupon payments are only paid when an underlier is above the coupon barrier level on specific observation dates. Some scenarios are described below. This Note type may be ideal for investors wishing to express a mildly bullish or even slightly bearish view on an underlying index.
Structured Notes are customizable protective investment vehicles built with the goal to meet a variety of market scenarios. They are also used to suit the risk and return objectives of clients – be they risk-seeking, risk-averse, or somewhere in between. A Note is simply a derivatives package combined with a long bond position, and their market value is typically driven by the return of a stock or index, called the underlier.
Contingent Income Note Specifics
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 even 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 hypothetical illustration can help demonstrate how a Contingent Income Note may behave. This example assumes a 20% coupon barrier level and 30% hard principal buffer level (learn how hard protection works here).
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.
Structured Notes have complex features and may not be suitable for all investors. They are sold only by prospectus and investors should read the prospectus and pricing supplement carefully before investing as they contain a detailed explanation of the risks, tax treatment, and other relevant information about the investment. The tax treatment of structured notes varies depending on the offering, and can be uncertain in some cases. Structured products are sold through financial professionals, and investors should consult their accounting, legal, and/or tax professional before investing.
Please see our other important disclosures.
