What are structured products?
Structured products are designed to facilitate highly customised risk-return objectives. They are linked to the performance of various underlying assets to potentially enhance your yield or returns in terms of coupon and interest. Most structures provide principal protection for investments purchased and are held to maturity, while some even come with a minimum return. They are available in both conventional and Islamic.
What structures are available?
The available structures include:
- Interest rate-linked structures: These structures give out return based on the movement of interest rates (KLIBOR, LIBOR, etc). They only pay the stipulated coupon if certain conditions are satisfied and/or maintained
- Debt-linked structures: Investments in these structures offer pay out based on the yield on debt or fixed income securities
- Foreign exchange-linked structures: These types disburse a return linked to a particular currency or basket of currencies. They are relatively a short-term investment or deposits where the return is linked to the movement in the currency rates of the selected market or currency basket over the life of the deposits
- Equity-linked structures: These structures pay a series of coupons linked to a particular listed equity or basket of listed equities
- Index-linked structures: These structures provide returns based on the performance of indices (KLCI, Fund, etc). They also pay the quoted coupon if certain conditions are satisfied
- Commodity-linked structures: These investments pay a return linked to the performance of a commodity or basket of commodities over a defined period. On the maturity of investment or deposits, investors receive the principal amount plus return, if any, based on the percentage change in the underlying commodity (or basket)
- Credit-linked structures: These instruments offer exposure in performance of certain credit names without having to directly purchase selected bonds
- Hybrid structures: Hybrid structures offer a return based on the performance of a combination of asset classes. They normally provide stable returns and investors can benefit from diversified and mixed portfolio investments
- Principal protection for NID form (only if held to maturity or call)
- Gain from potentially higher yielding assets or markets with limited downside risk exposure
- Minimum return of a portion of initial deposits (if held to maturity or call)
- Diversification through participation in various assets or markets with minimum or no cost
Before making any investment decision, a number of risk factors should be carefully and appropriately considered.
- Coupon Income Risk: If the reference or underlying assets do not satisfy the predetermined conditions during the life of the investment, the return can be lower, or even zero, as compared with the return on traditional deposits or fixed rate securities of comparable maturity and credit quality. Therefore, these instruments may not be able to pay periodic interest. Hence, they may not be suitable for investors who require regular income payments.
- Credit Risk: While most structures provide protection on principal, or a minimum return of initial investment upon maturity or if called, any such guarantee rests on the credit quality of the issuer. Most issuers are evaluated for credit quality by local and international rating agencies. Credit ratings reflect the independent opinions of the credit rating agencies and are not a guarantee of credit quality. In the case of default, an investor may lose all or part of the principal as well as any accrued interest.
- Liquidity Risk: While secondary markets for these instruments are generally available, we do not guarantee such a wholesale market will exist. Nevertheless, we will always provide liquidity for our structures for investors who may want to terminate them prior to maturity. However, these instruments should always be considered as a buy-and-hold investment. If sold prior to maturity, market conditions or changes in the credit quality of the issuer may cause the resale price to be lower than the purchase price.
- Call Risk: Most structures may be called by issuer (but not the investor except in certain cases) prior to maturity and thereby exposing investors to reinvestment risk. That is, if issuers decide to call in the structures, investors risk losing higher interest deposit or investment.
- Exchange Rate Risk: The value of investments denominated in currencies other than Ringgit will be affected by fluctuations in the currency markets.
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