Characteristics of PAR Note
- They are typically sold during the initial offering period and so are sold by Prospectus only
- Term: Typically maturities range from 14 to 24 months
- Interest: Interest is typically paid at maturity, but may offer a guaranteed minimum rate of return
- Leverage:
- Upside: Typically pay a multiple of the underlying asset
- Downside: Limited or no principal protection
- Capped Value: Upside may be capped
- Protection: Do not provide Principal Protection
Example Our hypothetical is a 14 month Note tied to the performance of the fictional HARN Index. It will pay 3 times the upside performance of the Index, capped at a maximum return of 22% for the Note. If the index goes down, the Note will diminish in value at a rate of one for one. There will be no principal protection feature on this note and the investor may lose some or all of their principal. The return is calculated on a point-to-point method.
| Underlying Assets | HARN Index |
| Term | 14 Months |
| Initial Offer Price | $10.00 |
| Capped Value | 22% Maximum Return |
| Participation | 3x Upside (to Cap) |
| 1x Downside | |
| Principal Protection | None |
The Ending Value is 50% Lower
The chart below shows that although the value of the underlying asset may move throughout the life of the Note, only the Starting and Ending Values are used to determine the Redemption Amount.
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Ending Value Higher
| In this case the underlying asset was up a total of 4% on the end date. Because the leverage the investor will earn three (3) times the gain, or 12%. |
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| In this example the index is up 25%. However, the redemption amount is capped at 22% so regardless of the ending value the return will never exceed the capped value, so in this case the investor will receive a return of 22%. |
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Read more about this topic: Principal At Risk Notes
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