Deutsche Bank has structured what is thought to be a first-of-a-kind note with a guaranteed return and a maturity that fluctuates depending on underlying interest rates. The concept, dubbed Target Redemption Note or TARN, can be used for any type of investment strategy but the most popular form is proving to be around an inverse floating rate note, according to Rashid Zuberi, director in interest rate derivatives in London.
For example, investors requiring a 15% return would receive a 9% coupon after the first year and then variable semi-annual coupons. They would continue to receive the semi-annual coupons until they have generated the 15% return. The coupons are calculated by multiplying six-month dollar LIBOR, which was 1.12% on Friday, by the leverage of the note. This is then deducted from the 9% coupon. In this example it gives the investor a 6.76% coupon and would therefore mature in two years.
Investors win if interest rates stay low, or rise at a slower rate than the market predicts. In addition, they are also protected against a loss of capital by the guaranteed redemption feature, explained Zuberi.
The notes can be bought as either a zero-coupon or coupon paying structure, said Zuberi.
