Tuesday, November 20, 2012

Structured Products Highlight: Buffered SuperTrack Linked to the S&P 500

By Tim Dulaney, PhD

Today we're highlighting a structured product issued on September 30, 2011 by Barclays.  This product (CUSIP: 06738KWL1) is a Buffered SuperTrack Note linked to the Standard & Poor's 500 (S&P 500) index.

This particular note offered investors exposure to the S&P 500 with buffered protection if the index declines over the term of the note.  Specifically, if the index level is not more than ten percent below the initial level at maturity, investors receive their entire principal investment.  An index level below this buffer will result in one percent loss of principal for each additional percent decline of the S&P 500 (minimum payout is $100 for each $1,000 face-value note).

Investors pay for this partial downside protection by limiting their upside exposure to the S&P 500.  The largest return an investor can hope to experience with this product is 17.25%, independent of how great the rise in the S&P 500.  Since this product is issued by Barclays, purchasers of the notes were exposed to the possibility that Barclays would have been unable to meet the obligations spelled out in the note's offering documents.

This particular buffered note matured on July 31, 2012 and investors received $1,157.09 per $1,000 face value note. This spectacular return -- over 20% on an annualized basis -- is the result of the significant rise in the S&P 500 index level during the term of the note (see the following figure).

At issuance, we valued this particular product at about $0.97 per dollar invested.  The difference is, in Barclays' words, the result of "Certain Built-In Costs [that] Are Likely to Adversely Affect the Value of the Notes Prior to Maturity."

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