Fixed Coupon Notes
At a Glance
Regular coupon payments
Potential to earn an enhanced return if the performance of the underlying financial instrument is in line with the expected view
Potential to earn enhanced yields, based on market price movements
What are FCNs?
FCNs are a type of equity-based structured note. They provide regular coupon payments to the investor regardless of market conditions.
Investors can either get their principal back in full, plus coupons, or they are “put” (or contractually obligated to buy at a specific price) the worst performing stock in a basket of equities, plus the agreed coupon payments.
How do FCNs Work?
Investors agree with their bankers or stock brokers on a basket of stocks, “strike” levels, “knock-in” levels, “knock-out” levels, the tenor of the note and the nominal or principal amount to invest.
What happens then depends on the performance of the “Least Performing Equity” (LPE). At regular agreed “Observation Dates”, if the spot prices of all the underlying stocks are equal to or above their knock-out levels, investors will get their principal repaid in full, plus the agreed coupon payment (pro-rated) and the note ends or gets “knocked out”. Otherwise, the note continues until maturity or sometimes called the “final valuation date”.
On maturity, if the LPE is at or above the strike price, investors will get back their principal in full, plus the agreed coupon payment.
If the LPE closes below the strike price on maturity, investors will be “put” the LPE (that is, paid in shares of the worst performing stock), plus the agreed coupon.
Illustrative Example of an FCN with 2 underlying shares:
Let us assume an investor invests HK$200,000 to purchase an FCN based on the following parameters:
|Underlying||Basket of Company A and Company B|
|Strike level||95% of initial level|
|Call (Knock-out) level||98%|
|Call frequency||Monthly periodic|
|Scenario||Is Knock-out Triggered?||At or Above Strike Level||Redemption|
|1||Yes||N.A.||Principal + Coupon for 1st month |
|2||No||Yes||Principal + Coupons|
|3||No||No||Principal converted to LPE share at strike + Coupons|
|4||No||No||Principal converted to LPE share at strike + Coupons|
The above example is for illustration purposes only. The illustrative example does not reflect a complete analysis of all possible potential return or loss scenarios
Benefits of FCNs
Investors will receive fixed coupon payments.
Enhanced yields may be earned if the investor’s view of the underlying equities is correct.
An FCN can be tailored to suit the investor’s needs, based on his/her choice of parameters, such as the underlying equity, strike price, and tenor.
Investors have a wide selection of equity securities, exchange traded funds, and indices as the underlying equity in the FCN.
Risks of FCNs
The investor risks being “put” the worst performing stock in the basket if the stocks are below their strike price on maturity.
The final redemption amount depends on underlying asset’s performance and could be zero. Investors could face a partial or entire loss of principal.
FCNs are issued by financial institutions and investors are exposed to the credit risk of the issuer.
FCNs are sophisticated investment products that carry significant risks and are not suitable for investors who do not comprehend the product or are risk averse. FCNs is considered as complex product, investor should exercise caution in relation to the product. FCNs is for Professional Investor only.
Risk Disclosure and Important Notice
The information herein is for information only. DBS accepts no liability whatsoever for any direct, indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents
Investment involves risks. The information provided is based on sources which DBS Bank Limited and DBS Bank (Hong Kong) Limited believe to be reliable but has not been independently verified. Any projections and opinions expressed herein are expressed solely as general market commentary and do not constitute solicitation, recommendation, investment advice, or guaranteed return. The above information does not constitute any offer or solicitation of offer to subscribe, transact or redeem any investment product. Past performances are not indicative of future performances. You should make investment decisions based on your own investment objective and experience, financial situation and particular needs. You should carefully read the product offering documentation, the account terms and conditions and the product terms and conditions for detailed product information and risk factors prior to making any investment. If you have any doubt on this material or any product offering documentation, you should seek independent professional advice.
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Fixed Coupon Notes (“the Product”) are investment products and some of them may involve derivatives. The investment decision is yours but you should not invest in the Products unless DBS Bank (Hong Kong) Limited who sells them to you has explained to you that the Products are suitable for you having regard to your financial situation, investment experience and investment objectives.
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