Capital-Protected Structured Bonds

The investors’ market for structured investment products has traversed an impressive evolution during the last fifteen years. The diversity of the offerings reached previously unimaginable dimensions: Structured products are being composed by traditional investment products like fixed income bonds and derivative instruments. They enable investors to change and optimize their risk-return profile by asymmetric pay-off profiles. In other words the investment universe significantly enlarges by the appearance of these new types of investment opportunities. The economic benefit of such products has different aspects: As derivatives allow a very efficient risk transfer, they also ease the investors’ risk and asset allocation. On the other hand they promote access to underlyings, that otherwise would not be possible to obtain. Especially advanced structured products are often based on underlyings – like commodities – that usually cannot be easily bought by private investors. Thereby structured products fulfill a market completion and generate additional diversification potential. As market standard these products are issued as capital guaranteed bonds, thereby minimizing the downside risks for the investors. This article will present the most common pay-off profiles of capital-protected structured bonds and their functioning mechanisms.