Compare. Save. Insure.

Fixed Coupon Notes (FCNs) have become increasingly popular among investors looking for enhanced yields in today’s volatile market.

While attractive, these structured products also come with risks that every investor should understand before committing funds. This article breaks down how FCNs work, their key features, risks.

A Fixed Coupon Note is a structured note that pays investors a fixed coupon (interest) at regular intervals, as long as no underlying asset breaches certain price levels. The underlying asset is usually a stock or basket of stocks (eg $tsla, $pltr, $nvda etc).

- They offer higher yields than traditional bonds.

- Coupons are paid even if the underlying stocks fluctuates, as long as the basket of stocks stays above the Knock-In (KI) level.

- Tenors are relatively short (usually 3–12 months).

Here are the essential terms you must know:

1. Strike (%): The price you will you pay to obtain the stock if KI is breached at the end of the maturity period

2. Knock-In (KI): A downside protection threshold expressed as a percentage of initial price.

For example,
$Tsla is worth $420 at contract,
Strike = 75% x $420 = $315
KI = 65% x $420 = $273
If $Tsla falls below $273 at end of maturity, KI is breached and your principal invested will obtain $Tsla shares at $315.

3. Knock-Out (KO):
Ends the FCN early if the underlying stocks rises above the KO level.

For example,
KO = 105% x $420 = $441
If $Tsla exceeds $441 at an observation date, the FCN knocks out. When KO happens, the investor will receive the Principal + Accrued coupon (yield)

4. Coupon Rate

The yield paid, typically 8% to 25% per annum depending on volatility and structure.

Let’s assume:
• Underlying: Tesla (Tsla) current price @ $420
• Strike: 75% ($315)
• KI: 65% ($273)
• KO: 105% ($441)
• Coupon: 12% p.a.
• Tenor: 12 months
• Investment amount: $200,000

• FCN continues till maturity at end of 12 months.
• Monthly coupon = $200,000 x 12%p.a = $2000/mth over 12 months
• You receive coupons every month for 12 months, and receive your principal of $200,000 at end of 12 months tenor.
 

• Receive monthly coupon of $2000 for 6 months
• Receive the principal of $200,000

• Receive monthly coupon of $2000 for 12 months
• Principal of $200,000 is used to purchase shares of $Tsla at $315 (Strike Price)

1. Equity Risk:  If the underlying collapses, the investor bears loss upon physical settlement.

2. Liquidity Risk: FCNs are not meant for early redemption.

3. Issuer Risk: 100% dependent on the issuing bank. FCN are typically unsecured structured product. In the event of the issuer's insolvency or default, investors face the risk of partial or total loss of their principal investment, as there are no underlying tangible assets securing the note. 

FCNs can be attractive if:
• You understand the risks
• You don’t need liquidity
• You’re comfortable owning the underlying if assigned
 

In conclusion, Fixed Coupon Notes can provide the investor with high coupon yields and limit the downside risk of the underlying assets.

With proper understanding and strategic selection of underlying stocks, they can complement a diversified investment portfolio.