Article

What are Contingent Yield Notes?

Contingent yield notes do not seek price appreciation, or growth of the underlying asset, but rather the creation of a contingent income stream.

A structured solution is a debt obligation that combines a zero-coupon bond with an options package based to create a single investment security; this single security enables investors to seek a predetermined payout profile linked to the performance of a separate underlying asset. An investment in public equities, through indices, ETFs, single stocks, commodities, or currencies can be accessed via a structured solution, which may expand an investor’s opportunity set and provide certain benefits associated with alternative investments, along with its associated risks.

In previous pieces on structured solutions, we discussed two different strategies of growth-focused notes that may both enhance return and provide downside risk mitigation. Another strategy we will be analyzing is known as a contingent yield note. Generally, these notes do not seek price appreciation, or growth, of the underlying assets, but rather the creation of a contingent income stream. In many cases, these strategies may provide above-market returns as they may have a higher risk associated with equity market exposure and the potential for contingent loss of both principal and coupon, when in comparison to traditional fixed income securities.

An investor considering an investment in contingent yield notes should carefully review any materials describing such a product, and its risks, including but not limited to the following specific risks:

  • market risk

  • call and reinvestment risk

  • credit risk

  • interest rate risk

  • illiquidity risk

  • capped return

  • no direct ownership of the underlying assets

  • returns may underperform broader market

  • tax considerations

  • origination costs

If you would like to learn more about contingent yield notes, the deep dive of this article is available by logging into the CAIS Platform.

Authored by

Nicholas Reade
Nicholas Reade

Analyst, Investment Strategy | CAIS

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