The key feature of a Principal Protected Note (PPN) for investors is that the issuing financial institution, usually a bank, provides a guarantee to repay 100% of the invested capital as long as the investor holds the PPN to its maturity date.
PPNs offer investors an opportunity to share in the increase in value of the underlying benchmark, such as a stock index, mix of equities, commodities, currencies or hedge funds, while paying for the capital protection either through fees and/or giving up a portion of the return.
PPNs are often marketed as an alternative to low yielding Fixed Income alternatives, such as Guaranteed Investment Certificates (GICs) and government bonds. PPNs are often positioned as Buy and Hold investments that allow investors to share in the increase in value of the underlying benchmark without risk of capital losses. Most often the investment return is only achieved and paid at the PPN’s maturity. However, a few PPN issues do provide a return of cash-flow which is paid out of the PPN’s equity component.