What’s Ahead:
- Structured Note Payoffs can potentially turn traditional equity returns into an income stream
- Fixed 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 Fixed Income Notes, one type of Structured Note payoff, can convert equity returns into income across a wide 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 Fixed Income Payoff Notes
Fixed 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 regardless of the Underlier’s return. This allows the Fixed Coupon Income Note to generate positive returns when the Underlier is experiencing losses.
However, 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 Fixed Income Notes modify the Underlier’s return:
| Underlier Return | Coupon Paid |
|---|---|
| Positive | Yes |
| Negative | Yes |
The following chart can be used to show how Fixed Income Notes pay their Annualized Yield regardless of the return scenario for the Underlier:
Fixed Income Notes may be a good option if you want to enhance an asset to generate a reliable income stream in any market environment. It’s most effective in mildly positive to severely negative market scenarios. For more information on choosing note types, we recommend reading our “Choosing a Payoff Type” guide.
By understanding how Fixed 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.
