Principal-Protected Notes and CDs

Education graphics PPNs and CDsGeneral Description

Principal-Protected Notes and CDs offer investors 100% principal protection, if held to maturity and the issuer is able to fulfill its obligation. They offer conservative investors the ability to participate in the upside potential of an underlying asset. Performance can either be derived from the performance of a selected index or multiple underlying indices (U.S., foreign, or both). Underlying assets can include one or more equity indices, individual stocks, Exchange Traded Funds, commodities, or foreign currency. Principal is not at risk from negative performance of the underlying asset (but is subject to issuer credit and default risk). These are sophisticated investments structured around an investor’s preferences, such as tolerance for risk, investment time horizon, market outlook, or interest in a particular asset class or security. These notes are for “buy and hold” investors and have terms ranging from two to seven years. The Participation Rate for Principal Protected Notes, while usually 100%, can be more or less, depending on the structure. They can be customized to suit the needs of investors, regardless of their expectations for market performance – bull, bear, or in-between.

How They Work

The initial investment is used for two purposes: The majority is invested in a Zero-Coupon CD or Note that will accrete to par by maturity. The remaining portion is used for option strategies to give the investor participation in the underlying asset(s). If the value of the reference asset has appreciated at maturity, the investor receives 100% of their principal investment plus a percentage of the return of the reference asset (determined by the Participate Rate).

May Be Suitable for Investors Who Are:

  • Seeking participation in an underlying asset but not willing to risk their principal to get it
  • Looking to diversify their investment portfolio
  • Knowledgeable concerning how options work and comfortable with investing in securities incorporating options
  • Willing to hold their investment to maturity

Important Features

  • Low minimum investment: $1000 minimum initial purchase; $1000 increments thereafter.
  • 100% principal protection (if held to maturity)
  • High credit quality: Typical issues are from banks with a credit rating that is investment grade or better, although credit quality should not be the sole basis for an investor’s decision.
  • Participation in performance of the underlying asset

How Returns are Computed

  • Participation Rate: This is the predetermined percentage rate by which the investor will share in the asset gain. While in most cases the Participation Rate is 100%, sometimes the percentage can be greater than 100%, providing a multiple of the actual underlying asset’s performance, a leveraged return that outperforms the underlying asset.
  • Maximum Return or Cap: In some cases Structured Notes will be issued with 100% participation up to a cap or maximum return. This is the maximum interest the investor can earn on the investment.
  • Minimum Return: In some cases there is a minimum return regardless of the performance of the underlying asset. Payment is not contingent upon the underlying asset being equal to or greater than its Initial Value. If the underlying is below the initial price on the determination date, the investor still earns the minimum return in addition to return of principal.

Computation Variations

  • Point-to-Point: Compares the increase or decrease of the underlying asset from the Initial Value Date to the final Determination Date. The investor’s return will be based upon the total percentage increase or decrease.
  • Averaging: Calculated on the basis of several specified Value Dates throughout the term of the note. Aim is to reflect the value trend of the underlying asset and minimize exposure to fluctuations that can affect the end-point price. While averaging may limit the return in a bull market, it will help protect against a sudden downturn of the underlying assets as they near the Final Determination Date.

Market Linked CDs:

An Alternative Means for Creating a Principal Protected Structured Product
A Structured Note is comprised of two components – a principal protection component and an option. While most issuers use the investor proceeds to purchase a zero-coupon bond to provide principal protection, an alternative to this is for the issuer to purchase, instead of a security, an FDIC-insured zero coupon Certificate of Deposit (CD). The investor’s principal is thus protected (insured) up to $250,000 (per depositor per insured bank). For additional FDIC Insurance information, please visit

Considerations & Risks

    • Principal Risk: These notes offer 100% principal protection, if held to maturity and the issuer is able to fulfill its obligation. If sold prior to maturity, the investor may receive less than their initial investment. Again, principal is not at risk from negative performance of the underlying asset, but is subject to issuer credit and default risk.
    • Limited Return: Investors in some Principal Protected Notes may never receive more than their initial investment in some notes regardless of how well the underlying asset did throughout the term of the investment. Therefore, the return of the notes may be significantly less in comparison than the direct investment in the underlying asset.
    • Liquidity: Principal Protected Notes are not designed to be liquid; they are intended to be held to maturity. While there may be a secondary market, issuers are under no obligation to maintain one. Selling prior to maturity carries with it the risks inherent in factors that can affect marketability, such as volatility of the underlying assets, interest rate swings, and developments affecting the underlying securities.
    • Creditworthiness of the Issuer: The extent to which any principal is protected is subject to the quality of the issuer’s credit. Principal Protected Notes and CDs are subject to the risk that the issuer might not be able to meet scheduled interest or principal payments. The investor should investigate the creditworthiness of the issuer to evaluate its ability to meet the terms of interest and principal payment. For certificates of deposit of FDIC-insured banks or savings institutions, the investor’s principal is protected up to $250,000 per depositor per insured bank. In addition, certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor, per insured bank. For more information, please visit
    • Issuer Call: Some Principal Protected Notes are callable by the issuer, meaning the issuer (not the investor) can choose to call in the notes and redeem them before maturity. An early call prior to maturity may put the investor at risk of reinvesting in a lower interest rate environment. The call price is generally par (100% of principal), but in some cases it can be above par (“premium call”).
    • Taxes: For full information regarding the tax consequences of Principal Protected Notes, investors should consult their tax advisor. In the case of 100% Principal Protected Notes, while interest is not paid until maturity or the call date, interest on Principal Protected Notes may be subject to OID (Original Issue Discount) tax based on the interest rates for similar investments issued at a similar time. For the purpose of reporting tax information, the applicable comparable rate is specified in the disclosures.