The price of FTSE 100 options is so expensive that providers of guaranteed bonds are having to incre...
The price of FTSE 100 options is so expensive that providers of guaranteed bonds are having to increase capital risk to generate attractive headline income rates, writes Jane Wallace.
According to a research by Merrill Lynch, 'Structured Retail Products June 1999', some products have only an 85% chance of generating the annual returns required to ensure investors receive full return of capital on maturity of the bond.
Merrill Lynch has back tested the guaranteed bonds to 1970, using reconstructed indices if those now used were not then available.
The tests show the percentage chances, or annualised standard deviation (ASD), of the product not achieving the advertised returns over all the periods monitored.
For example, the Scottish Life Income Bonus Bond Series 2 is linked 50% to the FTSE 100 and 50% to the Swiss SMI Index. It offers 9% income or 150% of the indices' performance over five-and-a-half years.
The growth required in the basket of indices to produce full return of capital is 5.87% a year. Merrill Lynch estimates, however, that the ASD of the product away from that level is 14.91%. The Britannia International Capital Equity Bond has an ASD of 14.42%.
Other bonds look less risky. For example, the Eurolife 3 Years Plus Pep and Eurolife Income Plus Bond have ASDs of 11.17% and 9.67% respectively. The Canada Life High Income Bond has 10.52% and the NPI High Income Bond has 8.9%.
Because of the risks involved, Pinnacle Insurance has pulled the launch of its planned second guaranteed bond for this year.
General manager Clive Moore said: "We have drawn the line at the four-year term and FTSE 100 Index, and will not cross it."
Other companies are planning launches. Singer & Friedlander is to launch a five-year bond linked to the Eurostoxx 50 offering income of 8.25% in September. Scottish Mutual will offer a 8% over three years, also in September and also linked to the Eurostoxx.
Despite improved risk appetite
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