Skip to main content
Callable market linked income notes are a type of structured investment linked to the performance of an underlier such as an equity index, stock, or other reference asset. They are designed to offer higher income potential than traditional debt instruments.

How Do Callable Market Linked Income Notes Provide Income?

These notes can provide income, paid monthly, quarterly, semi-annually, or annually, as long as the underlier remains at or above a certain threshold, which is called the coupon contingency level. If the underlier falls below the coupon contingency level on any of the observation dates, the periodic payments stop until the underlier rises above the threshold on a future observation date.

Callable market linked income notes can include one of two call features. In the example below, we look at a callable market linked income note that could be redeemed early based on the performance of the underlier. This type of call feature is called autocall because the note is automatically redeemed if the underlier is at or above a certain level on observation dates, as specified in the offering document.

Let’s consider a note with the following terms:

This note pays a semiannual coupon of 10% per annum as long as SPX is at or above 70% of its initial level on the semiannual observation dates. Because it has an autocall feature, the note will be automatically redeemed early for par if SPX is at or above 100% of its initial level on any call observation date, noting that call observation dates take place semiannually starting one year after the trade date (the non-call period). This note also has protection in the form of a 30% barrier. This means the holder is not exposed to principal losses if the underlier is at or above the barrier protection level, which is 70% of its initial level, at the end of the term. However, if the underlier is down more than 30%, the protection disappears entirely, and losses are one-to-one from SPX’s initial level.

What is the Payoff Under Different Hypothetical Market Outcomes?

Let’s look at three examples of hypothetical market scenarios to understand how the above callable market linked income note would behave in each. These are not representative of actual market scenarios, nor do they represent all possible market scenarios.

When to Consider Callable Market Linked Income Notes

For investors looking to build more income potential into their portfolio, callable market linked income notes may be a welcome consideration. While such notes offer the possibility for higher yield in the form of contingent coupons, they also carry a greater degree of risk that must be weighed, including full exposure of principal to losses, issuer credit risk, and liquidity risk. Take note of the following key benefits and considerations:

Benefits

  • Income Potential: Callable market linked income notes can deliver higher income potential than certain other income producing investments, like corporate bonds or treasuries. This income is subject to certain contingencies and is not guaranteed.
  • Downside Protection: Callable market linked income notes offer more protection than a direct investment in the underlier itself, although less protection than traditional debt instruments.

Considerations

  • Contingent Income: Callable market linked income notes can stop paying income or be called based on the performance of the underlier. It is possible that zero coupons are received during the life of the investment.
  • Downside Exposure: Unlike corporate bonds or treasuries, callable market linked income notes expose principal to risk of loss based on the performance of the underlier.
  • Credit Risk: Investors who hold callable market linked income notes are exposed to the credit risk of the issuer and must be comfortable with the issuer’s creditworthiness for the life of the investment.
  • Liquidity and Statement Value: Callable market linked income notes are buy-and-hold investments, which means that investors must be comfortable holding the note until maturity in order to receive any return of principal. There is no guaranteed secondary market. Issuing firms may offer to buy back a structured investment before maturity, typically at a discount to statement value, however they are under no legal obligation to do so.
  • Call Feature: Callable market linked income notes can be called before maturity based on the performance of the underlier, as specified in the offering document. It is possible the trade does not last for the full length of the stated term. This introduces reinvestment risk to the extent a trade is called early and similar re- investment alternatives are not available.

Investments frequently utilized to generate yield include preferred stock, corporate bonds, stocks with high dividend yields, and municipal bonds. Each type of investment offers a different risk-reward profile. When investors consider which type of investment is best for their given circumstances, it’s important to ask the following:

Does the investment vehicle deliver adequate potential reward for its associated risk?

The nature of this question is situation-specific and must take into account an investor’s investment objectives, risk tolerance, and additional factors. To the extent the answer is no for current holdings, an investor may consider the alternative risk-reward profile offered by callable market linked income notes.

Structured investment products and services may be offered through SIMON Markets LLC (“SIMON”). SIMON is a registered broker/dealer, member FINRA and SIPC, and is affiliated with iCapital, Inc. and its subsidiaries. Please see the disclaimer at the end of this document for more information about these entities.

Please contact your financial professional or a fund manager to learn more.

DOWNLOAD PDF

IMPORTANT INFORMATION — DISCLAIMER

STRUCTURED INVESTMENTS ARE CONSIDERED COMPLEX PRODUCTS AND MAY NOT BE SUITABLE FOR ALL INVESTORS.

This material is intended as general background information, for educational purposes only, and this material should not be used as a primary basis to make an investment decision. The material provides a general overview of the products described, and actual financial instruments may differ materially from those described. No person should consider investing in an instrument on the basis of these materials. Any investment decision should be made only after carefully reviewing the applicable prospectus. Please remember that all instruments described in this material involve a risk of loss. This does not constitute legal, accounting or tax advice, and the recipient should consult with his or her legal, accounting or tax adviser regarding the instruments described in this material.

This material is for informational purposes only and is not to be construed as a recommendation or an offer or solicitation to buy or sell any security, financial product or instrument, or otherwise to participate in any particular trading strategy. In providing information on hypothetical, generic structured investments, neither SIMON Markets LLC nor Axio Financial LLC is recommending a specific security, or recommending investing a certain percentage of a portfolio to one structured investment. Before investing in any product, an investor should review the prospectus or other offering documents, which contain important information, including the product’s investment objectives or goals, its strategies for achieving those goals, the principal risks of investing in the product, the product’s fees and expenses, and its past performance.

Please note that there is no public secondary market for structured investments. Although the issuer may from time to time make a market in certain structured investments, the issuer does not have any obligation to do so and market making may be discontinued at any time. Accordingly, an investor must be prepared to hold such investments until maturity. Any or all payments are subject to the creditworthiness of the issuer. SIMON Markets LLC operates a platform that makes available offerings of structured investments and annuities to financial professionals. In operating this technology platform, SIMON Markets LLC earns revenue based on the volume of transactions that take place in these products and would benefit by an increase in sales for these products. Issuers of structured investments pay Axio Financial LLC fees based on the size of transactions.

This material may not, without the prior written consent of SIMON Markets LLC or Axio Financial LLC, be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Neither SIMON Markets nor Axio Financial shall have any liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability, or completeness or to update any data contained in this material nor for any special, indirect, incidental or consequential damages which may be incurred or experienced because of the use of the data made available herein, even if SIMON Markets or Axio Financial has been advised of the possibility of such damages. This material was not prepared with a view to public disclosure or to conform with any disclosure standards under any state, federal or international securities laws or other laws, rules or regulations, and neither SIMON Markets LLC nor Axio Financial LLC take any responsibility for the use of the information in this material.

Structured investment products and services may be offered through SIMON Markets LLC and/or Axio Financial LLC, each a registered broker/dealer, member FINRA and SIPC, and subsidiary of iCapital, Inc. (“iCapital). iCapital affiliates include Institutional Capital Network, Inc., iCapital Securities, LLC, and iCapital Advisors, LLC. iCapital Securities, LLC, a registered broker/dealer, member FINRA and SIPC, offers alternative investment products and services. iCapital Advisors, LLC is an investment adviser registered with the SEC. The referenced registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.

© 2023 SIMON Markets LLC. All rights reserved.
© 2023 Institutional Capital Network, Inc. All Rights Reserved.

Was this article helpful?
YesNo
Back to Structured Investments