In the last issue of "Leonteq Know-how", we took a close look at capital protection certificates and dealt in detail with the construction and payout profile of the variant with participation. In the current Knowledge Newsletter, we now take a detailed look at other popular forms of this product category.
The time to deal with capital protection certificates seems favorable. The recent rough stock market phases have increased the need for security among many investors. And this class represents the lowest-risk version of structured products and is thus suitable for investors with very low risk tolerance. At the same time, with a satisfactory return at minimal risk, capital protection certificates offer a real alternative to bonds or cash.
One extremely popular product category is capital protection certificates with a coupon. Here, the participation rate is replaced by a regular coupon payment. The coupon payment can be guaranteed or, in the form of a conditional coupon, depending on the price performance of an underlying asset. The underlying asset can be shares, indices or other assets. Important for the structure of a capital protection certificate is the general interest rate level, because its central component is a zero coupon bond. In the case of such a bond, there are no ongoing distributions, and the debtor passes on the interest to the buyer in the form of a price discount at the time of issue. The difference between the nominal and cost price is used by the issuer to finance an option component of the capital protection certificate to generate yield. This in turn explains why the attractiveness of capital protection certificates also increases with rising interest rates, as more money is available for the option. For products with a 100% guarantee, the risk is limited solely to the default of an issuer and a changing interest rate landscape. If interest rate changes occur in the market during the term, they affect the prices of the capital protection product. Rising interest rates cause prices to fall - and vice versa. However, this problem only arises during the term of the capital protection certificate; during the final fixing, only the amount of the predefined repayment guarantee plays a role.
We would like to use practical examples to illustrate the interesting investment opportunities offered by capital protection certificates with coupon. Recently, Leonteq issued a corresponding product (Valor: 128354666) on the SMI trio Novartis, Roche and Swiss Re. This certificate offers a guaranteed interest payment of 1.75% p.a. during the 3-year term and additionally a "magnet coupon" of 2.25% p.a. The "magnet coupon" is paid out under the condition that all underlyings close above their starting level on the annual observation date. If this should not work out on a date, this is not a big deal. Due to a memory function, the coupon is not lost, so the payout can be made up at a later date. At maturity, the nominal amount is 100% guaranteed.
With a built-in callable function, the interest rate can be increased even further. This is because the risk for the investor that the investment period will be shortened is usually compensated with better conditions.
In addition, the coupons of capital protection certificates are not always entirely linked to the performance of an underlying instrument. The Callable Fixed Coupon Note (Valor: 117179735) has fixed coupons of 2.25% p.a. and is paid out annually. Consequently, a minimum interest rate is guaranteed with this option. Shortly before the coupon is paid out, the observation date for early redemption also takes place. Should the issuer call the product, holders of the note will receive 100% of the nominal back in addition to the coupon payment. This structure shows that it has clear advantages over fixed-term and term deposits or even bonds, as the latter yield significantly less. For example, the yield on Bundesobligationen Eidgenossenschaft for a term of ten years is only around 1% p.a. (as of 28.08.2023).
The latter example shows that capital protection certificates can not only ensure a calmer sleep in turbulent market phases, but also provide risk-free and at the same time lucrative access with regard to less familiar markets such as the money market. While with a fixed coupon note the payout remains the same, with a floored floater the coupons are variable. Here, too, an interesting and also highly profitable product can be found in Leonteq's "used product range". The Floored Floater on the CHF SARON 3M (Valor: 127765860) issued last year with a term of three years participates in the "Swiss Average Rate Overnight" as soon as it crosses the 2.00% line. Every three months on the observation date, the interest rate is determined and the coupon payment is calculated. If the SARON 3M is above the floor level of 2.00% p.a. on the observation date, the actually determined value for the calculation period is paid out, otherwise the floor level. At the end of the term, the nominal amount of CHF 1,000 is fully guaranteed.
For those who prefer to participate from the very beginning, the current subscription offer (as of 29.08.2023) includes an attractive Floored Floater with a Floor Level of 2.25% p.a.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.