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Fixed Coupon Notes - Benefits & Risks
At a Glance
Regular coupon payments
Potential to earn an enhanced return if the performance of the underlying financial instrument is in line with the expected view
Potential to earn enhanced yields, based on market price movements
What are FCNs?
FCNs are a type of equity-based structured note. They provide regular coupon payments to the investor regardless of market conditions.
Investors can either get their principal back in full plus coupons, or they are “put” (or contractually obligated to buy at a specific price) the “least performing equity” (or worst performing stock) in a basket of equities plus the agreed coupon payments.
FCNs are sophisticated investment products that carry significant risks and are not suitable for investors who do not comprehend the product or are risk averse.
How do FCNs Work?
Investors agree with their bankers or stock brokers on a basket of stocks, “strike” levels, “knock-in” levels, “knock-out” levels, the tenor of the note and the nominal or principal amount to invest.
What happens then depends on the performance of the “Least Performing Equity” (LPE). At regular agreed “Observation Dates”, if the closing spot prices of all the underlying stocks are equal to or above their knock-out levels, investors will get their principal repaid in full, plus the agreed coupon payment (pro-rated) and the note ends or gets “knocked out”. Otherwise, the note continues until maturity or sometimes called the “final valuation date”.
On maturity, if the LPE is at or above the strike price, investors will get back their principal in full plus the agreed coupon payment.
If the LPE closes below the strike price on maturity, investors will be “put” the LPE (that is, paid in shares of the worst performing stock) plus the agreed coupon.
Illustrative Example of an FCN with 2 underlying shares:
Let us assume an investor invests S$200,000 to purchase an FCN based on the following parameters:
|Underlying||Basket of Company A and Company B|
|Strike level||95% of initial level|
|Call (Knock-out) level||98%|
|Call frequency||Monthly periodic|
|Scenario||Is Knock-out Triggered?||At or Above Strike Level||Redemption|
|1||Yes||Yes||Principal + Pro-rated coupon |
|2||No||Yes||Principal + Coupons|
|3||No||No||Principal converted to LPE share at strike + Coupons|
|4||No||No||Principal converted to LPE share at strike + Coupons|
Benefits of FCNs
Investors will receive fixed coupon payments.
Enhanced yields may be earned if the investor’s view of the underlying equities is correct.
An FCN can be tailored to suit the investor’s needs, based on his/her choice of parameters, such as the underlying equity, strike price, and tenor.
Investors have a wide selection of equity securities, exchange traded funds, and indices as the underlying equity in the FCN.
Risks of FCNs
The investor risks being “put” the worst performing stock in the basket if the stocks are below their strike price on maturity.
The final redemption amount depends on underlying asset’s performance and could be zero. Investors could face a partial or entire loss of principal.
FCNs are issued by financial institutions and investors are exposed to the credit risk of the issuer.
To understand the product-related terms, visit our Glossary.