Customized Equity Investing
PPNs can be easily customized to respond to current market conditions or investor preferences. Notes can be designed to provide growth or income. Both domestic and global markets can be combined to complement and diversify an investor’s portfolio.
Full Principal Protection
PPNs will provide a full return of the principal invested in a note, regardless of the performance of the underlying investments. Notes are bank deposit liabilities which are senior unsecured debt obligations of the Royal Bank of Canada.
Transparent, Passive and Formulaic
The return on PPNs 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 is fully transparent.
- The investor is exposed to the performance of the underlying equity investment. Although the principal is fully guaranteed at maturity, the note may not provide return in the form of coupons or a final variable payment at maturity.
- The note may trade below the initial investment amount over the term of the note, particularly if the underlying equity investment performance is sufficiently negative.
- Although investors might hold a note linked to an underlying equity investment that generates dividends, PPN 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.Growth PPNs
Investors who are looking for gains based on the growth of global markets or underlyings, yet no appetite for risk are best suited to investing in Growth PPNs. These strategies typically offer full or capped participation in equity market performance. In the event the equity market’s returns are negative at maturity of the note, investor’s principal is returned.
For example, an investor could gain exposure to the North American market by holding a note that is linked to the performance of 10 – 15 North American equity securities. The investor participates in the return of the equity portfolio at maturity by way of a single payment. However, if market weakness negatively affects the equity portfolio and it drops in value, the investor does not realize the negative performance, and receives 100% of the invested principal back at maturity. The investor has the benefit of participating in equity market returns, and is protected from any potential loss at the end of the investment period, thereby enhancing their risk-adjusted returns.
Investors keen on potentially receiving higher income than what GICs or other fixed income instruments typically offer, are able to do so with PPNs. Income PPNs are typically linked to a portfolio of 10 to 20 equity shares, and offer either fixed or minimum income payments in the first few years of the investment, followed by variable income payments to a cap for the remaining years in the term.
Variable Interest is often determined by taking the average of the performance of each share in the portfolio, where each share is subject to a maximum and a minimum return. The maximum annual coupon is paid if all Shares in the portfolio appreciate from the inception of the note to the annual coupon valuation date. The downside performance of each of the equities is typically floored, to limit participation in negative equity returns.