Structured notes: a bank’s promise, built with options

A structured note is a bank’s debt combined with options on an index. It offers a defined outcome: some protection from losses in exchange for limited gains. The protection is only as good as the bank, and the costs are built into the price.

Education only. We explain how these products work and what they cost. We do not sell or recommend securities.

The numbers

What the regulator says to watch

Unsecuredprincipal protection is “only as good as the financial strength” of the issuer; if it fails, holders are unsecured creditors (FINRA)

Below pricethe issuer’s own estimated value is generally less than what you pay for the note (FINRA)

About 2 ptsa year in S&P 500 dividends, 1999–2023, that a note on the price index does not pay

How it is built

A bond and an options contract in one wrapper

The bondMost of your money is a loan to the issuing bank, repaid at maturity if the bank can pay.

The optionsThe rest buys options on an index or stock that create the payoff: a cap, a buffer or barrier, a participation rate.

CapThe most the note will pay over its term, no matter how far the index rises.

Buffer or barrierA buffer absorbs the first part of a loss. A barrier protects only until it is breached, and then the full loss can apply.

Price index onlyMost notes track the price index, so dividends are left out, as with indexed annuities.

Built-in costsFees are embedded in the structure and hard to see. FINRA calls them “relatively high and sometimes difficult to determine.”

Liquidity and callsNot exchange-listed; selling early can mean a significant discount. Some notes can be called early by the issuer.

How the payoff works

A 3-year note with a 20% cap and a 10% buffer

Over 3 years, the index	Index	Note pays	What happened
A strong market	+40%	+20%	Capped: gives up 20 points
A modest gain	+10%	+10%	Fully credited
A small loss	-5%	+0%	Buffer absorbs the loss
A large loss	-25%	-15%	Loss beyond the 10% buffer

Hypothetical terms for illustration, not any actual note. Index price change only; dividends not included. Assumes the issuer pays in full.

Case study

Case study coming

A note offered to a real-world style investor, what it cost inside the price, and how it compared with owning the index directly.

Before you buy

Questions to ask

Who is the issuer, and what is its credit rating?
What is the issuer’s estimated value compared with my price?
Is it a buffer or a barrier, and what happens below it?
What is the cap, and does it track the price index or total return?
Can the issuer call it early, and can I sell before maturity?
What is the seller paid to place this note with me?

Own a structured note? Bring the pricing supplement and your statement to a product review. We will walk through how it works and every cost inside it. We do not recommend buying, selling or replacing any investment. Schedule a product review → All by-products →

Advanced Capital & Investments pages are for education only. Nothing here is an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or investment strategy, and we do not sell securities through this site. Examples are hypothetical, do not represent any actual product and do not reflect taxes unless stated. Investing involves risk, including loss of principal. Before investing in any fund, read its prospectus and talk with a properly registered professional.