2.16  Structured Products

Structured products combine elements of debt and equity securities. For instance, a common structured product combines a bond with a derivative. Structured products are appealing to retail investors because they often promise features that a single type of product cannot provide on its own, such as higher yields with principal protection. But structured products are often complicated for retail investors to understand.

The structured products that have received the most attention from regulatory organizations are structured notes with principal protection, often called principal protected notes (PPNs). These are long-term notes that track an index and offer principal protection. The note is usually a zero coupon bond that pays the principal back at maturity, plus some participation in the performance of an index. This type of unsecured note offers principal protection plus additional returns by combining a bond structure with a derivative that is based on the performance of an index (e.g., stocks, currencies, commodities). Usually a financial institution, such as a bank or broker-dealer, issues the notes, and they often mature in 10 year