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What are Contingent Yield Notes?

A structured note is a debt obligation that combines a zero-coupon bond with an options package to create a single investment security.

This single security enables investors to seek a predetermined payout profile linked to the performance of a separate and unrelated underlying asset. An investment in public equities, either through indices, ETFs, or single stocks, as well as commodities and currencies can be accessed via a structured note, thereby potentially expanding an investor’s opportunity set and providing certain benefits associated with alternative investments, along with attendant risks.

In previous pieces around structured products, 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, yield notes do not seek price appreciation, or growth, of the underlying, but rather seeks to create an 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, in comparison to traditional fixed income securities.

An investor considering an investment in Contingent Yield Notes should carefully consider any related material describing such a product including the specific risks. These risks include:

  • 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, and

  • origination costs.

Structured investments should not be considered a single asset strategy, rather they can be an alternative investment tool to enable investors to seek to hard-to-reach markets or to tailor specific market views within a well-diversified portfolio. While some notes are developed to capitalize on market performance, others like yield notes look to provide stable returns for investors who are willing to accept a degree of principal and coupon risk in the event of a severe market downturn.

A deep dive of the blog post is available by logging into the CAIS Platform.

Authored by

Nic Millikan, CFA, CAIA
Nic Millikan, CFA, CAIA

Head of Investment Strategy | CAIS

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Nicholas Reade
Nicholas Reade

Investment Strategy Analyst | CAIS

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If you would like to learn more about structured products or if you have additional questions, please reach out to a CAIS Structured Products Representative.

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