Principal Protected Note (PPN
Principal Protected Notes (PPNs) are complex structured products which feature a fixed income component guaranteeing the return of your principal, along with a market-based investment that offers a chance (though not a guarantee) to generate a profit on the investment. This investment component is generally a derivative instrument such as a call option on an underlying market index.
Investor Rationale: The protection of the note ensures full or partial return of an investor’s principal while the derivative component offers a chance to receive payments based on the performance of the underlying index. Due to the nature of the “participation rate”, the return on PPNs can be in excess of the index it tracks.
Investor Profile: Due to their complex nature and at times, high minimum investments, PPNs are more suitable for sophisticated retail and institutional investors, who do not require a steady cash flow stream.
- Principal protection
- Potential for returns above and beyond underlying index
- Generally issued by highly sophisticated/ credit worthy institutions
- Variable return profile of an index means payments are not guaranteed
- Loss to principal can still be experienced in event of market crash
- Not insured by CDIC
- Potential of illiquid secondary market
- Call risk (auto-call feature)