What are principal-protected notes, and why are they now an issue in the global financial crisis ?
Principal-protected notes, or PPNs, are complex instruments that guarantee an investor will get his or her principal back at maturity, but also offer the potential for a far greater return if certain indexes, commodities, mutual funds or baskets of stocks appreciate in value. They are usually sold through financial planners. Some of them are causing problems for the issuers because the stocks, funds or indexes have taken such a fall in recent weeks. A simpler form of PPN is the “market-linked” or “market-growth” guaranteed investment certificate (GIC). These GICs are sold to retail investors by many of the big banks and are less complex, but the idea is the same. You are guaranteed to get your money back, usually after a three- or five-year term, and you’ll get more – usually up to a capped amount – if a specific stock index increases in value. GICs are also guaranteed by Canada Deposit Insurance Corp., while PPNs are not. Am I going to lose money on the PPNs or market-linked GICs that
