A structured note that provides investors with an above market coupon, but against foregoing coupon payments when the floating rate (LIBOR, typically) breaks outside the boundaries of a specific range.
For example, if the market coupon for an ordinary note is 6%, a range note may pay a 8% semi-annual coupon conditional on the semi-annual LIBOR remaining within a range of 4-7%. In this sense, coupons are counted on dates when LIBOR remains within the range. Days spent outside the range are not counted, i.e., no coupon payments will be expected from the note. The investor receives the 8% coupon when LIBOR exceeds 7% or falls below 4%. The payoff structure of a range note is similar to that of a digital cap and a digital floor. Effectively, a range note means the investor sells those two options (digital cap and floor) in return for a higher coupon rate. In this case, the investor is said to be selling volatility and betting on relatively stable interest rates.
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