What is a PPN variable return?

This is the return the investor earns over the term of the PPN in addition to the return of their invested capital. There is no standardized name. The Variable return is often referred to as the Basket Return, Coupon Return, Variable Interest or simply the Payment at Maturity. Each PPN has its own unique formula for calculating the final investment return and the formulas range from a simple percentage of a familiar and traceable index to the insanely complex. Some are so complex that one has to wonder if the issuing institution understands the calculation. The investor’s variable returns have a stated participation rate that can be as low as 20% and as high as 300% of the underlying benchmarks’ appreciation. The variable returns can also be zero and in some instances possibly negative, contrary to the assumption that the investor’s principal is guaranteed. As investors you should read and understand the formulas and the method of calculating the variable returns before proceeding to purchase.

Note: The two most important words to watch out for in the summary section of the Information Statement are “if any.” (For example, “The Note holder will be paid Variable Interest, if any, … .”)  The Information Statement will always present Back-Tested examples of potential investment outcomes for each note, and two out of three will demonstrate that the investor will earn a variable return. But remember the PPN did not exist before and, therefore, it does not have an established track record by which to judge its performance. At the very least, investors should go to the various PPN web sites listed at the bottom of our PPN Overview section to study the returns for current outstanding PPN issues. Look for a PPN that is indexed to the same or similar benchmark to see what their performance has been to date. In the absence of a measurable track record for a PPN the performance record is probably the best source for understanding potential outcomes. Investors should not rely solely upon the Back-Tested potential outcomes stated in the Information Statements.

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