By Todd Genger

Responding to volatile markets, financial institutions have developed principal protected financial instruments that provide a guaranteed rate of return and growth potential linked to the performance of broad-based market indices such as the S&P 500, the NASDAQ-100 or the Dow Jones Industrial Average). They are in some ways a hybrid between stocks and bonds, as the products have characteristics common to both fixed income and equity investments.

Every structured note is constructed somewhat differently, but there are some basic underlying characteristics that distinguish structured notes from other financial products. Often, the financial reality of the product involves the purchase of an option that with a payout at maturity, allowing the product to offer its particular return profile. Use of option strategies provides the necessary leverage.

A principal protected note is backed by the firm that issued the note, so investors should have a level of confidence in the stability of the institution guaranteeing the note. In the case of an insolvency or bankruptcy event for the issuer of the note, the holder would be treated as a senior unsecured debt holder of the issuer, shared Todd Genger.

Another risk for note holders is liquidity. After the note is issued, structured notes typically trade at a discount to their value at issuance. Unlisted structured products are not intended to be actively traded. Investors should purchase with an intention to hold to maturity.