What is a structured note?

1 min readLast updated January 30, 2024by Unbiased team

Discover what structured notes are, as well as the different types of structured notes available on the hybrid security investment market.

Summary 

  • Structured notes are hybrid securities that combine multiple payoffs from multiple securities. 

  • Structured notes are generally a bond and a derivative, with the bond making up the largest share. 

  • Different types of structured notes have their own ROI system. 

What is a structured note? 

A structured note is a type of hybrid security. It combines a variety of payoffs from multiple securities, typically a bond and a derivative. This makes it a type of security that is considered both safe and volatile, depending on what the chosen securities are.  

Generally, the bond makes up 80% of a structured note, and the derivative makes up the other 20%. The bond offers principal protection and security to investors, while the derivative offers upside potential. This hybrid aspect of structured notes makes them a unique type of investment with a lot of potential for high returns if you know which one to use and how to use it to your advantage.  

What is an example of a structured note? 

There are a few different types of structured notes to consider when making this kind of investment, all of which we’ll cover a little later on.  

For now, let’s take a look at an example:  

A five-year bond with an options contract is one typical kind of structured note.  

This type of note could track a basket of equities, including an equity index, currencies, interest rates, and a variety of other commodities, such as technology or food products.  

What are the different types of structured notes? 

There are multiple different types of structured notes.  

Each one comes with its own type of return on investment (ROI) system that impacts the profit gained.  

  • Commodity-linked structured notes – These notes incur returns based on the commodity indexes or stocks, such as energy, livestock, or technology.  

  • Equity-linked structured notes – Equity-linked notes rise or fall in value based on the performance of stocks.  

  • Currency-linked structured notes – Currency-linked notes are influenced by the value exchange of international currencies such as the Euro or US dollar.  

  • Credit-linked structured notes – Structured notes in this category track companies' specific credit risks and events.  

  • Interest rate-linked structured notes – These structured notes follow the behavior of a set interest rate, such as that on a mortgage.  

What are the advantages of structured notes? 

Structured notes can come with many advantages if you choose the right type for your financial circumstances and know how to use them to their full potential. Some of the most notable benefits include:  

1. Customization 

As hybrid securities, structured notes are flexible and can be customized to your preference or level of expertise. This makes them a convenient security choice for people who like to make personalized, specific investments.  

2. Enhanced returns  

With the freedom to customize securities, structured notes present the opportunity to enhance returns. They have the potential to yield significant returns, depending on the performance of the chosen hybrid assets.  

3. Easy diversification 

Structured notes are easy to switch around and customize, making diversification a natural byproduct. Investors can expose their portfolios to a wider range of asset classes and market segments.  

What are the disadvantages of structured notes? 

Like all investment strategies, the hybrid nature of structured notes has fallibilities to consider. Some of the main disadvantages of this type of security include the following:  

1. Complexity  

Structured notes are not the simplest type of security to invest in, so involving yourself with them can require additional research and monitoring.  

2. Liquidity risk  

Hybrid securities like structured notes come with a certain degree of limited market liquidity, which is not ideal for every investor.  

3. Opportunity cost  

If your chosen assets do not perform as predicted, you could miss out on the opportunity to invest in other, better securities. However, this is a natural disadvantage that comes with most investment types.  

Seek expert financial advice 

Structured notes are multifaceted hybrid securities that can offer a high return on investment if you know how to utilize them effectively.  

With the right guidance, you can ensure that the type of structured note you choose benefits you best. 

Let Unbiased match you with a professional financial advisor.  

Writers

Unbiased team

Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.