Investment risk - under control
Return of the nominal value of the bond is guaranteed if the bond is kept until the redemption term
How to earn more and safely?
Invest into shares, share indexes or funds, the stock exchange products or their indexes not directly but by purchasing INDEX-LINKED NOTES whose probable profitability is high while the nominal value is always protected.
INDEX-LINKED NOTES - what is it?
The investment product of AB Bank SNORAS - INDEX-LINKED NOTE (ILN) - is the bank issued non-negotiable valuable security whose profitability directly depends on the change in value of shares, share indexes, investment funds, the stock exchange products or the baskets of the aforementioned financial instruments (hereinafter - Index) as well as investment ratio.
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Who INDEX-LINKED NOTES are designated for?
Index-linked notes are designated to you if you desire:
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To have an opportunity to invest profitably. The probable profitability of the index-linked note is higher than that of a regular bond or time deposit.
- To protect your invested capital. Having acquired an index-linked note or having kept it until the redemption date, you will regain the nominal value of the bond even in that case if the alteration in the value of Index is negative during the validity period of the bond.
To start investing into investment instruments of higher profitability and accordingly of higher risk. If you do not have investment experience and do not want to take up the price fluctuation risk of these investment instruments, then the index-linked note is exactly that investment instrument which will enable you to earn more without risking of forfeiting the nominal value of the bond if you keep the bond until the redemption date.
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To choose yourself the level of risk/profitability. You can choose a higher risk level acceptable to you, which will stay unchangeable within the entire period of investment, by paying a set amount of risk premium at the time of purchasing the bond. As a result, you will receive a higher investment ratio which will considerably increase the profitability of the index-linked note during the rise of the Index value. If the Index value decreases, the greatest loss you will incur is the paid risk premium which you chose yourself while purchasing the bonds.
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To have an opportunity to sell bonds prior to the redemption term. By choosing index-linked notes, you are determined to invest for a specific period which is equal to the term of the bond, yet you have an opportunity to sell the bonds prior to the redemption term. However, the selling price of the bond on the secondary market depends on the market conditions and it can be less than its nominal value.
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To diversify the risk of investment portfolio. The index-linked note is also designated to an investor who already has experience in the sphere of investment and wants to lower the risk of his investment portfolio.
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To invest for a specific term. Investment into index-linked notes has a clear term. It is attractive to an investor with a specific investment horizon. By investing directly into shares or their funds, you may prolong the investment term for an unlimited period if prices decrease and the investor does not want to incur any loss.
Investment ratio. Investment ratio is the part of increase in the index value, which you receive if you keep the bond until its redemption date.
Example: Suppose that investment ratio of a specific bond with the nominal price of LTL 100 is 80%, and during the bond term the value of the Index which the bond is linked to increased by 50%. Then the bond profitability will be calculated as follows: 0.5 x 0.8 x 100 = 40%, while the bond redemption price will equal 100 + 40 = 140 Lt.
Risk premium. Risk premium is a way to increase investment ratio. While purchasing a bond, you can pay an additional amount - risk premium - and you can acquire a higher investment ratio, i.e. a considerably greater part of the Index increase. This additionally paid sum is called risk premium because you risk of forfeiting this amount if the Index value drops or rise insufficiently.
1 Example: Suppose that while purchasing a bond with the nominal value of LTL 100 you paid an additional amount - LTL 10 (10% from the nominal value of the bond), which increased your investment ratio up to 135%. If during the bond term the value of the Index which the bond is linked to increased by 50%, then the bond profitability will be calculated as follows: 0.5 x 1.35 x 100 = 67.50%, while the bond redemption price is 100 + 67.50 = 167.50 Lt.
2 Example: Suppose that while purchasing a bond with the nominal value of LTL 100 you paid an additional amount - LTL 10 (10% from the nominal value of the bond), which increased your investment ratio up to 135%. If during the bond term the value of the Index which the bond is linked to increased by 5%, then the bond profitability is calculated as follows: 0.1 x 1.35 x 100 = 6.75%, while the bond redemption price is 100 + 6.75 = 106.75 Lt. Therefore, your total invested sum was LTL 110, and the amount regained at the end of the investment is only LTL 106.75.
Is it worth paying risk premium? The greater is the positive change of the Index value the more profitable is the bond with the highest investment ratio. As the Index value rises, the profitability of the bonds purchased with 10% risk premium (blue line) is greater than the profitability of the Index itself (brown line), while the maximum risk for the entire investment period does not change and it reaches 10% (on the diagram, it is reflected by the straight section of the blue line showing profitability, which equals -10%). It means that if the Index value remains on the same level or drops, you will regain the nominal value of the bond on the redemption day, and your loss will not exceed 10%.
What does the bond profitability depend on?
The bond profitability depends on:
- The change of the Index value within the bond validity period. This change is calculated by comparing the final Index value with the initial value. The initial and final values of the Index are fixed and calculated in the Final Provisions of every emission under the prescribed order.
- Investment ratio. If the change of the Index value is positive, the bond profitability can be calculated via multiplying the value of this change by investment ratio. If the change of the Index value is negative, the bond profitability will equal 0.
Example: Marius acquired a bond worth LTL 100, while Laura and Darius obtained LTL 100 bonds with 10% risk premium. In the chart, you can see how the volume of investment ratio and diverse change of the Index value have impact on the final profitability of the index-linked note and the redemption price.
From these examples you can see a possible increase of the bonds' price if there is a specific growth of the Index. However, the Index value can not only rise but also drop; therefore, the increase of the bond price can be less or higher. If the situation on the market is unfavourable, the increase of the bond price can equal 0, i.e. the redemption price of the bond would be identical to its nominal value.
NOTE: Prior to making a decision on investing into index-linked notes, be sure to familiarize yourself with the Final Provisions of these bonds, the emission prospectus and the risk factors described in it which are associated with these bonds, and also make an evaluation whether this risk is acceptable to you.
The presented data is informative and it cannot be interpreted as a recommendation to purchase bonds, neither can it be the basis or part of any transaction concluded later on.
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