A certificate of investment that represents an amount of money surrendered or deposited with an entity (e.g., a bank, institutional investor, etc.) for the purpose of gaining a return commensurate with its term (the time from inception til maturity date). In addition, the certificate is structured in a such a manner that it provides extra features such as capital protection, upside participation, downside participation, etc.
A prime example of a structured certificate is the bonus certificate. It that gives the holder an opportunity to avail sideway trends of the market over the short run. The expected dividend payouts are used to finance the so-called security buffer- i.e., the conditional capital protection (principal guarantee) provided by the certificate. This offers capital protection on the initial investment at maturity, provided the price of the underlying(s) does not drop below a predetermined barrier. Otherwise, losses start to accumulate. The holder (investor) will receive a bonus at maturity, depending on the price of the underlying stock(s) at that time, and its (their) performance during the certificate’s life. The payoff of a bonus certificate depends on the underlying closing above its start value on one of the frequent observation dates. The return is capped on the upside (that is, subject to a cap level).
Other examples of a structured certificate include convertible certificates (exchangeable certificates), discount certificate, early repayment certificate, tracker certificates and turbo certificates.
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