I have found a PPN that guarantees a minimum of 1.0% and a maximum 6.25% annual coupon. It sounds great. Is it?

Be careful when reading the disclosure and marketing materials and using the information contained. Are the minimum and maximum rates of return per year or are they for the full term to maturity? Sales and marketing materials often contain inadequate promotional presentations of the potential investment returns. For instance, beware of the following shortcomings:

  • They provide disclosure about the potential upside return of the investment, but often insufficient information regarding how much the underlying investments would need to increase in value in order to attain the projected potential investment returns.
  • The PPN’s promotional material often relies on back-testing to show what the performance would have been if the PPN had existed and the investor had owned it.
  • The disclosure and promotional materials are essentially based on hypothetical performance outcomes.

In addition, PPNs are becoming more complex and pose investment risks that investors may not be fully informed about. Often investors just assume that today’s PPN is structured the same as previous PPNs and this may not be true.

Note: Through the sale of PPNs, intermediaries are selling retail investors products with investment risks that are more like those risks associated with alternative asset classes otherwise not accessible to retail investors without a prospectus.

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