Current Options
Disclosure Document
(PDF Format) 

 


Securities Future 
Disclosure Document
(PDF Format) 


 

 

Twenty-First
Securities Corporation

780 Third Avenue
New York, NY 10017
212.418.6000
info@twenty-first.com


Spring 2008, Volume X, Issue 1    


Do-it-yourself Structured Notes


Structured notes exist in two forms those with a principal guarantee and those without.  Profits from notes with guaranteed principal are taxed as interest.  In the form of CDs tied to the market (also available as exchange-traded notes or over-the-counter privately negotiated contracts), they present a safe bet on a risky asset, offering upside participation on the market with the assurance of capital preservation.

One can replicate the principal guarantee by purchasing a zero-coupon bond due at the maturity of the note.  A five-year U.S. Treasury zero costs about 80 cents on the guaranteed dollar.  Next up is the possible payoff tied to an index or asset.  The issuer will have about 20 cents on the dollar left to buy an option to produce the upside exposure linked to a particular asset or index.  In the example of a CD linked to the

  Suggested Reading: Bloomberg Brief: Structured Notes

 Standard & Poor's 500 stock index, the issuer could buy an at-the-money call on an S&P 500 exchange traded fund.  The triple-A Options Clearing Corp. guarantees these listed options.  By purchasing these two instruments, the adviser can offer the investor the upside of the market with no downside.

Take New York-based EverBank's MarketSafe Gold Bullion CD.  A five-year CD guaranteeing the purchaser's money back if gold declines, and a payoff if gold rises.  Today, a five-year U.S. government zero-coupon bond costs 83 cents on the dollar and an at-the-money call option on gold costs about 15 cents on the dollar.  If an adviser bought these instruments himself instead of EverBank buying them to offer a CD, the adviser would save 2%, investing just $98 instead of $100.

Further, if gold rose, any profits on the gold option would be capital gain rather than higher taxed interest income. For those sophisticated enough to break a principal guaranteed note into its components, this seems the preferable route.

 

This article and other articles are provided for information purposes only.  They are not intended to be an offer to engage in any securities transactions or to provide specific financial, legal or tax advice. Articles may have been rendered partly inaccurate by events that have occurred since publication.  Investors should consult their advisers before acting on any topics discussed herein.   

Futures are not suitable for all investors.  They involve risk, and an investor who employs them can lose all or part of his investment.  Before engaging in a futures transaction, investors must receive certain regulatory disclosure materials.

 



 



     

 

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