Structured Notes

Structured notes are financial products offered by big banks (Goldman Sachs, Morgan Stanley, Bank of America). They have been around since 1990 but many investors are unaware of how they work and what benefits they can provide. They are issued for certain periods, between one and two years with new offerings being made available monthly. Currently there is over 2 trillion invested in structured notes, about half of which are purchased by parties from the Pacific Rim. Generally there are three types of notes, The Principal Protected Note, which provides the lowest return but is also the safest.

Next is the interest note which pays a higher return (estimate between 8-11%). If an underlying index falls to below 70% of its initial level, that investment falls to that level also. (That happens about 8% of the time going back to 1988) It continues to pay the interest and the ultimate value of the note is determined by that index’s value at the end of the term when added to the interest paid. For example if a note paying 10% is triggered because the underlying index fell to 70% of its initial value, but climbed back to 90% of that value by the end of the term, the investor would break even.

Growth notes are generally for slightly longer periods (18 mo-2yrs) and link the investor’s funds to an index like the Nasdaq.

A multiple to the ultimate value at the end of the term is usually applied…. possibly 150%. It often includes a buffer….15% so that in the event of a decline in the index over the term the investor is protected to that level.