Principal protected notes guarantee investors a return equal to their initial investment, with the potential for higher returns. They offer an intermediate opportunity for investors seeking higher returns than bonds without taking on too much risk. The underlying securities can include mutual funds, hedge funds, or commodities. Holding the note until maturity is required, and understanding the underlying investments can be challenging.
Also known as principal protected products or principal protected securities, principal protected notes are a form of structured securities to provide a fixed income. With a protected principal note, the guarantee ensures that the investor will at least earn a return equal to the original amount invested. In many cases, the notes from this will earn a return that is considerably more than that original investment. The combination of low risk and high return potential makes this type of fixed income security attractive to many investors.
There are several types of investments that offer the benefit of little or no risk. These include various types of bond issues and guaranteed investment certificates. The difference is that a senior protected note tends to offer the opportunity for higher returns over time than these other two investment options, while carrying a similar degree of risk.
For this reason, a senior protected note represents an intermediate opportunity for investors. The note is likely to generate more returns than bonds while avoiding any major risk. At the same time, the security is definitely less volatile than investing in many stock options, and is likely to generate a fair but not as spectacular return. As a result, a senior protected note is a good choice for conservative investors who nevertheless want to earn as much as possible without taking on too much risk.
The underlying securities that are associated with a parent protected note may include some type of mutual fund or a group of hedge funds. There are situations where commodities serve as the underlying assets for a note. Different groups of funds can provide the backing of the note, as well as a basket of shares.
Regarding the guarantee of earning a return that is at least as much as the initial investment, there are some terms that apply to a principal protected note. The main provision is that the note must be held until maturity. Other provisions can be seen as advantages or disadvantages, depending on the mindset of the investor. For example, many such notes provide the opportunity to indirectly invest in a wide range of options, a feature that some will find attractive. Others will find the process of identifying and understanding the scope of these various underlying investments baffling. This can also be somewhat perplexing to an investor who wants to understand the historical performance of those underlying assets and what that history could mean for future earnings on a senior protected note.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
