Customized Equity Investing

NPPNs deliver tailored exposure to equity markets. Investors may customize the level of upside participation and exposure they want to equities. In markets with high expected growth, clients may consider growth products, such as an Accelerator or Booster (described below). These products provide enhanced participation in the positive performance of an equity market. For investors that require income, a Fixed Yield or Callable Yield product (described below), which provides the chance to earn above-market coupon payments, may be appropriate.

Risk Tolerance

Investors may also choose the level of protection they need by customizing an NPPN to accommodate their risk tolerance. Note features such as Buffers (partial protection) and Barriers (conditional protection) can provide various levels of principal protection to clients while still offering an equity-like return in positive markets.

Flexible and Timely Issuance based on current market conditions

NPPNs can be customized and available for purchase within a very short time-frame, typically a few days. Clients can participate in NPPNs when it best suits their investment outlook.

Transparent, Passive and Formulaic

The return on NPPNs is based on a formula so the current performance of the notes can easily be calculated at any point throughout the term of the note. The return formula is pre-determined before note issuance and the return calculation is therefore highly transparent.

  • These notes do not offer full principal protection so investors may lose all or a part of their initial investment.
  • Return formulas are pre-defined and cannot be changed during the term of the note. NPPN investors can sell an NPPN in the secondary market if their investment view has changed.
  • The investor is exposed to negative performance of the underlying equity investment, unless some level of protection is built into the strategy.
  • Although investors might hold a note linked to an underlying equity investment that generates dividends, NPPN investors do not receive these dividends.

How it works

Customizing the Return and Protection

Investors have the option to choose from Growth or Income Notes.

Investors may customize the level of upside participation and exposure they want to equities, as well as the amount of downside protection needed.
Tree - Investors may customize the level of upside participation and exposure they want to equities, as well as the amount of downside protection needed.
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Accelerator

Provides a multiple of the performance of an equity investment if its performance is positive at maturity.

Booster

Provides a minimum return at maturity if the performance in the underlying investment at maturity is positive and less than the stated Booster Amount.

Callable Yield

Are callable at a price equal to the original investment amount plus a return, if the equity investment is not below a pre-specified level

Fixed Yield

Pays guaranteed payments, often in the form of Return of Capital payments, on a regular basis and usually offers conditional principal protection at maturity.

Buffer

Protect an investor from a stated decline in the performance of the equity investment at maturity.

Barrier

Principal protection is conditional on the performance of the equity investment on the maturity date.

Choosing the Upside Return – Growth Notes

Growth notes are designed to enhance returns when market performance is positive. Boosters and Accelerators are two types of Growth notes.

Booster

A Booster will provide a minimum return at maturity if the performance in the underlying equity investment at maturity is positive but less than the stated Booster Amount.

For any positive performance greater than the Booster Amount, the investor will participate in the appreciation of the equity investment at maturity. For any negative performance in the equity investment, the investor will receive a return equal to the equity investment’s price return at maturity.

Employing a Booster strategy is appropriate in the following two scenarios.

  1. An investor is moderately bullish: As an example, a note that offers a 50% boosted return for any return in the equity investment between 0 - 50%, will provide the investor with a 50% payout at maturity even if the index performance is 0%. This is displayed visually in the graph on right.
  2. An investor is bullish but wants protection if equity market performance is mediocre: If the underlying generates significantly positive returns, the investor participates in these returns and does not have to sacrifice returns to receive the boosted return during mediocre market performance.
Growth notes are designed to enhance returns when market performance is positive

Accelerator

An Accelerator will return a multiple of the performance of an equity investment if its performance is positive at maturity.

An investor with a long time horizon looking for higher than average market returns could purchase a 6-year note that offers 1.5 times the appreciation of the S&P/TSX60 Index. At maturity, for any positive return in the equity investment, the investor receives 150% of such positive return.

Investors can build strategies that cater to their time horizon, investment view, expected return and of course risk tolerance.

Setting expectations right:

While not a risk, it is worth highlighting that the enhanced return, either the boosted return or the accelerated return, is reflected only at or close to maturity. Earlier in the term of the note, its return will lag that of the underlying index/return formula.

An Accelerator will return a multiple of the performance of an equity investment if its performance is positive at maturity
Choosing Level of Downside Protection

NPPN investors are able to build in a desired level of protection. Full protection, which is available through Prinicpal Protected Notes (“PPNs”), is costly so that it must be financed by giving up a significant portion of the return or income potential or extending the term of the note. NPPNs allow the investor to include partial or conditional protection so that only what is required by the investor is actually purchased, which leaves the maximum amount possible for investment in the equity return. Two common ways to provide this protection are through the use of Buffers and Barriers.

Partial Protection – Buffers

Buffers protect an investor (or ‘Buffer’ the return) from a stated decline in the performance of the equity investment at maturity. For example, a note with 30% buffer protection protects the investor from the first 30% drop at maturity. If the index were to suffer a loss beyond 30%, the investor would only participate in the drop beyond 30%, i.e. for a drop of 50% in the equity investment, the investor would only recognize 20% of the decline.

Buffer strategies when combined with boosters or accelerators offer investors the ability to enhance returns while providing protection against the initial loss of a stated amount.

Risks

While this strategy manages the risk of a market fall, investors need to be aware that the partial protection is guaranteed only at maturity. The investor is exposed to any loss on the index beyond the guaranteed level of protection.

Conditional Protection Barriers

These notes also offer full principal protection, however, the protection is conditional on the performance of the equity investment on the maturity date. For example, if a note offers 30% conditional protection at maturity, investors will be protected as long as the index does not drop by 30% or more at maturity. If the index were to drop by 30% or more, investors would fully participate in the drop and lose principal in line with the drop in the underlying. This is unlike buffered strategies where investors only participate in the incremental drop beyond 30%. This is a key distinguishing factor of barrier protection from buffer protection.

Risks

The barrier does not provide for a minimum guaranteed amount of protection. In addition and similar to the buffer above, while the investor is protected as long as the equity investment does not drop by the stated level, this protection is only guaranteed at maturity.

Choosing the Downside Return – Income Notes

Another category of NPPNs offer the ability to receive guaranteed or conditional income. Since full protection through PPNs can generate only limited income due to the cost of the protection, investors may consider conditional protection strategies to generate higher levels of income.

Fixed Yield Notes

This type of note makes guaranteed payments (often in the form of Return of Capital payments) on a regular basis and usually offers conditional principal protection at maturity. These notes are commonly linked to a single broad-based equity index such as the S&P/TSX60 Index, the S&P500 Index, etc. At maturity, as long as the index does not drop to the pre-specified level barrier level, the investor receives a return of principal. If the equity investment trades at or below the barrier level, the investor loses principal in line with the performance of the equity investment.

Risks

While these strategies can be meet investors’ need for income, it is relevant to note that the partial principal protection offered at maturity is conditional on the equity investment not trading below the barrier level at maturity. While not a risk, it is worth highlighting that investors do not receive any additional return based on the performance of the equity investment at maturity over and above the the guaranteed payments paid throughout the term of the note.

Autocallable Notes

These notes do not pay regular fixed coupons but instead are callable at a price equal to the original investment amount plus a fixed return, if the equity investment is above a specified level (the Autocall Level). If the note does not get called during the term and on maturity date the equity investment is not below the specified level, the note returns the original investment amount. However, if the underlying is trading below the barrier level at maturity, the investor receives market return and potentially a substantial loss of principal.

Risks

While the return on these notes can be quite substantial if the note is called, returns are not guaranteed and are conditional on the equity investment performance. Additionally, the principal guarantee at maturity is also conditional on the equity investment performance.