Q:How is a Structured investment developed?
A: Structured investments vary in terms of their constructions, though several use many of the same core principles. The financial engineering of these investments involves the purchase of an option that has a payout at maturity, supplying the investment with its emphasized return. Using options offers leverage, creating a diverse selection of risk and return opportunities
For example: when an investors buys a principal protected note with a payoff at maturity, based on an equity index like the NASDAQ 100 or the S&P 500 or the Dow Jones Industrial Average, the note can be distinguished into two separate components.
While this example may represent the core principles of many structured investments, each product is different and has its own risks and potential rewards.
Q: If my investment is principal protected, who guarantees that the principal will be paid back?
A: A principal protected note has the backing of the firm that issued the note. In the event where the issuer is in bankruptcy, the note holder would receive repayment at a rate equivalent to other senior unsecured debt holders associated with the firm. Principal protected notes do not have FDIC insurance.
A Certificate of Deposit issued by a bank is generally insured by the FDIC up to $250,000 per depositor, subject to FDIC rules.
Q: Would an issuer want the index underlying a Structured investment to go up or down?
A: The architects of structured investments often design investments that allow investors to achieve the maximum return, given their particular view of the market. In these circumstances, these designers do not usually have an active view on the structured investments they sell. Rather, an issuer more often hedges its exposure to the equity, and is thus indifferent to the rise or fall of the underlying structured investment.
Q: What if an investor wants to sell a Structured investment? Can an investor profit by actively trading them?
A: Once issued, structured investments typically trade at a discount to their value at issuance because of distribution and hedging fees that are part of the original issue price. When not listed, structured investments are not positioned to be actively traded instruments. Instead, structured investments are to be held to maturity. The value of the investments will not directly correspond to the underlying amount, and investors may not receive the expected payout if they sell their investments prior to the stated maturity date.
Q: Are there any special tax considerations?
A: The tax implications on structured investments differ with each risk and return profile, as well the tax situation of a given investors. Structured investments are often designed to enjoy the best possible tax treatment. Still, investors should contact their own accounting, legal and tax advisors for additional information.
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