Posted on October 15, 2010 by Rich Browne

Structured products are complex investment products consisting of a combination of investment instruments such as options and bonds. In general, options are used to bond yields and to keep the initial capital intact. And the rate of return is determined by the underlying values which range from equities, indices, commodities to foreign currency.

A structured product with capital protection acts as a bond investment, where at the end of term it recovers the nominal value. Structured products with capital protection comprise of a bond and an option, and some of the invested money is placed in a zero coupon bond to repay the nominal amount on the expiration date.

The remainder is placed in an option that establishes exposure to the selected asset class such as a specific market, a selected industry or various kinds of assets. The price of the option and the amount of money invested in the bond determines how many options are to be purchased. While the number of options determines the degree of participation.

Participation rates indicate the percentage resulting from the underlying asset’s development. And the participation rate may be increased by paying the premium.

The variation between the way notes (structured products) are compiled and the choice of underlying values is enormous. Unlike mutual funds, notes have a fixed term of usually between four and seven years.