The Nasdaq 100 will have to rise by 70.6% from its current level for investors in Canada Life's High...
The Nasdaq 100 will have to rise by 70.6% from its current level for investors in Canada Life's High Income Series III high yield bond to get their capital returned in full, writes David Griffiths.
The three year bond with returns linked to the index is due to mature on 12 April 2003, It was launched at an index level of 3,553.81 but as of close of business on 18 July, the index was at 1,666.87.
The terms and conditions of the bond allowed for a fall in the index of 20% before capital was at risk. However, the bond's structure includes a gearing ratio that means that every further 1% fall in the index over and above the 20% safety barrier will reduce investor's capital by 3.33%. Capital return is calculated upon maturity.
If at maturity the index has fallen 50% from its initial level, then investors will lose all of their original stake. This equates to an index level of 1,776.
Investors in the bond could theoretically break even if the index level at maturity was 2,506 or above. At this level, they would get back 68.5% of their investment, but will also have received three annual of coupons of 10.5%. The Nasdaq 100 would have to move by more than 50% from its current level for this to occur. This equates to 27% annualised growth in the index over the remaining 21 months of the bond's life.
Canada Life's other Nasdaq-100 linked bond vehicle, Platinum Income, will also be reliant on similar dramatic rises to safeguard original investments.
Launched on 28 July 2000, with the Nasdaq 100 at a level of 3,477.41, the index will need to rise 66.90% before it reaches the safety barrier.
As with High Income Series III, it is a three year bond, but pays a gross income of 11% per annum. It has a very similar structure to the earlier bond but investors will break even if the index reaches 2,437 at wind up in 2003. All capital would be lost below a final index level of 1,738.
Tim Mortimer, managing director of Future Value Consultants, which rates such products, said: 'To get your full investment back on the High Income Series III product you will need the index to experience 36% annualised growth from now until maturity. Theoretically this could happen but you wouldn't want to rely on it.
'The high gearing on this product is what's got it into trouble. It also launched at the height of the market.'
Simon Little, marketing manager, wealth management at Canada Life said: 'We would say that there is no need for panic. These bonds still have quite a long way to go before they mature. Alternatively, investors could surrender their policy. If a policy was surrendered today, you could still recoup over 50% of your original investment.'
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