A highly rated fixed-income security that contains embedded options and doesn’t necessarily reflect the risk of the issuer. In other words, structured notes are debt issues whose principal or coupon payments are linked to an underlying variable such as an equity index, bond index, etc. Examples include bonds in which the coupons are tied to the S&P 500, or zeros with a principal amount linked to the performance of a commodity index.
Structured notes are particularly used by investors to manage the exposure of their portfolios to asset classes or markets in which direct investment is impossible due to regulatory restrictions or investment mandates. In this sense, investors can participate in market growth and at same time limit their downside risk.
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