If you hold a Structured Note from BMO, Scotiabank or CIBC, you may be wondering about the value of your note currently. You bought these because they had downside protection and a good yield. Now, during this market correction, the market values look like they’ve dropped. What is going on?
There are actually two prices for any given note: the value of the underlying asset on which the note is based, and the secondary market price.
- The value of the underlying asset is the one from which the payouts and protection are based.
- The secondary market price is what shows on your statement and it is currently significantly lower than the value of the underlying asset.
Why the difference? Fundamentally the note does not invest directly into the underlying asset, instead it is built from option strategies. (Options are derivative products that give you the right but not the obligation to buy or sell a security at a certain price.) In periods of extreme volatility, options vary more widely than the underlying security so the price of the Notes can trade at a larger discount to the units of the Reference Asset.
The good news is this: the interest payment is contingent on the value of the underlying asset which at this current point with the market volatility due to the Covid-19 Pandemic is higher than the market value showing on your statement. Also, over time, if this note lasts the full maturity, the protection is based on the underlying asset, not the secondary price.
The secondary price only matters if you plan to sell your note before maturity. The Banks will buy your note back from you using the secondary market price. This will realize that big drop you see in the market value.
How do you know the value of the underlying asset?
We can manually send you a summary of the note data including the recent underlying price. Or, if you want to track them, you can go to the bank’s structured note website to look them up from the company who put out your note.
Should I be worried about it? No.
It’s never fun to see the value of your assets go down. Having said that, you do have extra protection on a note than holding other assets and they will recover and rebound in the same way as overall market recovers, based on the recovery of the underlying asset.
Also, as long as the underlying asset is within that 30% protection barrier, you will be paid your interest, which is typically a rich value. I.e. you’re paid while you wait.
- Notes have very long holding periods, typically 6 or 7 years. That is a very long time period in which to regain any value lost during this correction.
- It is a bank product and therefore backed by assets of the bank.
Here is a real example:
Note A is a CIBC note with an underlying asset of the Solactive Canadian Bank Index. The value of the note on the start date of Sept 25th, 2018 was $100.
On the day of writing, the underlying bank index was down 24.15%.
The market value of the note was valued at a discount to that, at $70.26 (down 29.7%).
It paid out its regular interest payment of 3.47% based on the valuation of March 6th. This interest payment is always based on the original value not the current market value. The next interest payout valuation is September 11th, 2020. On that date, if the value of the index is greater than or equal to -30% of the original value, the interest payment will be made. This happens every 6 months.
The note maturity date is September 18, 2025, i.e. 5 and a half years from now. If on that date, the bank index value is greater than or equal to -30% of the initial value, the investor gets the entire principal back with their final interest payment.
If you have any questions or want more clarification, please contact Zoe.
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