Overview of Structured Products

A financial instrument that provides a specific risk and return profile by tracking the performance of underlying assets.

A structured product that guarantees the return of the principal investment while offering potential for additional gains based on the performance of an underlying asset.

A structured product that links its return to the performance of a specific market index, providing potential for growth while offering a minimum guaranteed return.

A structured product where the issuer sells shares of the underlying asset to investors, creating a unique ownership structure.

A structured product backed by a pool of mortgage loans, offering investors a share of the interest and principal payments generated by those loans.

A type of principal-protected note (PPN) that links its return to the performance of an underlying index, such as the S&P/TSX 60 Index. The investor benefits from the index's growth but with limited exposure.

A feature in index-linked PPNs where the investor's return is limited to a percentage of the underlying index's growth. For example, a 75% participation rate means the investor earns 75% of the index's return.

In index-linked PPNs, this feature limits the maximum return the investor can earn, even if the underlying index grows significantly. For example, a 30% performance cap means the investor's maximum return is 30%, even if the index increases by more than 30%.

An investor who invests in a PPN with a participation rate of 75% and the index increases by 33% will not receive the full 33% return. Instead, they will get 75% of 33%, which is 25% growth.

An investor in a PPN with a 30% performance cap will not receive a return exceeding 30%, even if the index grows by 50%. Their maximum gain is capped at 30%, regardless of further index growth.

A type of investment in a split-share corporation where investors are entitled to all capital appreciation of the underlying asset above a predetermined price.

A split-share corporation that issues preferred and capital shares, with preferred shares receiving a fixed dividend and capital shares receiving capital appreciation above a certain threshold.

The minimum amount of capital appreciation that the underlying asset must have before capital share owners begin to benefit.

The risk that capital share owners will lose a larger percentage of their investment compared to regular common shareholders during a decline in the value of the underlying asset.

In the event of liquidation, preferred shareholders receive their dividends and capital back before capital shareholders receive anything.

The risk that a change in the creditworthiness of the preferred share issuer will negatively impact the share's price. A lower credit rating typically leads to higher yield demands and thus lower prices.

When investors purchase split shares, they might pay a premium above the redemption value. If redeemed early, they lose this premium. Investors should consider the potential loss and calculate the yield-to-call, the return if held until the call date.

A drop in the value of the underlying assets backs the split preferred shares. They offer some protection through the value of the capital share. However, a sustained decline in the underlying common share value can negatively impact the split preferred share price.

While preferred shares have a lower tax rate on dividends than interest income, this benefit depends on the investor's tax bracket and location. Changes in the tax code or the government's treatment of flow-through entities might affect the attractiveness of preferred shares.

Investors should consider the relative attractiveness of preferred shares in comparison to other investments, especially when considering changes in tax rates and potential capital gains.