Absolute Return Notes

[OAG]

Anyone heard of or use these things? Seems "to good to be true", while I do not really, but they seem to protect the principal: Absolute return notes: Investing with a no-loss guarantee - Feb. 12, 2009

[FIRE'd@51]

We have discussed these before on other threads. Chase Manhattan Bank first offered them as a retail product back in the 1980's. They are also called index-linked notes. Basically, they are a bull call spread on an index, say the S&P 500, purchased with the interest earned on a CD. Worst case, the market goes down or stays flat, the calls expire worthless, the CD matures, and you get your money back.

The downside is that you tie your money up with no return for the time until maturity of the note. I would guess that with the current high premiums in options, this time until maturity may be fairly long, otherwise your maximum return will be pretty small.

I'm not saying they are a bad idea, but they certainly aren't "too good to be true". If you want this return pattern, you are probably better off creating it yourself with a combination of index options and a CD.

[soupcxan]

I would be concerned that these notes are subject to credit risk of the issuer.

[FIRE'd@51]

Quote:

Originally Posted by soupcxan I would be concerned that these notes are subject to credit risk of the issuer.

Yep, good point. An issuer with poorer credit will have to pay a higher interest rate, which will "appear" to give you more market participation.