Unlike ordinary debt securities, IONs do not pay a periodic coupon
payment. Instead, at maturity the investor will receive a one-time
cash payment based upon the performance of the underlying index.
The payment at maturity is made up of two components, the principal
component and the out-performance amount.
The Principal Component
IONs are not principal protected; therefore, 100% of principal
is at risk. The amount of principal returned at maturity will
be determined by comparing the value of the underlying index
on a specified determination date to the value of the index
on the date the notes were priced. If the return of the underlying
index is zero or positive, the principal component will be 100%
of the principal amount.
If the return of the underlying index is negative, the amount
of principal returned at maturity will be reduced by the same
percentage as the percentage reduction in the value of the underlying
index since the date the notes were priced. This reduced amount
will be the principal component. This means that if the underlying
index has a return of -65%, the underlying index was decreased
by 65% and the amount of principal payable at maturity will
be reduced by the same 65%. Therefore, the principal component
paid at maturity would be 35% (i.e., 100% - 65%) of the original
principal amount.
A negative index return will always reduce the amount paid
at maturity below the principal amount of the notes, which reduction
may be substantial and could result in no payment at all at
maturity. Accordingly, investors may lose some or all
of their initial investment in the IONs.
The Out-performance Amount
The out-performance amount will be determined by comparing
the value of the underlying index on a specified determination
date to the value of the underlying index on the date the notes
were priced. If the return of the underlying index is zero or
negative, the out-performance amount will be zero. If the return
of the underlying index is positive, the out-performance amount
will be a multiple of such return, subject to a cap. This means
that if the return is +7%, the multiple is 3 and the out-performance
cap is 18%, the out-performance amount will be 18% (i.e., 7%
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