Daily range accrual
What is a daily range accrual and how does a fund manager explain it to a client?
CAPITAL AT RISK
What is daily range accrual?
Daily range accrual is a financial instrument, typically used in structured products or derivatives, that accrues interest based on the daily price movements of an underlying asset, like a stock or an index.
An example of a daily range accrual investment
Based on a 3.50% Income Semi-Annual Daily Range Accrual Note
The illustration is split into two sections:
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The investment terms briefly outlines the terms of the trade.
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The flowchart shows the potential returns the investor will earn over the life of the trade and how these returns are dependent on the performance of the index
Investment terms
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6 year term
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Maximum income of 3.50% semi-annually
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Income dependent on how many days the Index has closed within the range of 6500 - 7500
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Maximum total return of 42%
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Capital is protected if the Index is above 3500 at the end of the 6 years
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If the Index is below 3500 at maturity the 1p capital will be lost for every 1% fall in the Index
Payoff summary: How is the income paid?
Credit risk
The holder of the investments will be exposed to the credit risk of the issuer. A decline in the issuers credit quality is likely to reduce the market value of the product and therefore the price an investor may receive for the product if they sell it in the market.
Market risk
Capital repayment depends on the performance of the underlying; the future performance of which cannot be guaranteed.
Liquidity risk
The investments will not be traded on an organised exchange. The issuer will use reasonable efforts to quote prices in all market conditions.
Exit risk
The secondary market price of the investments will depend on many factors including, but not limited to, the value and volatility of the underlying index, interest rates, dividend rates, time remaining to maturity and the creditworthiness of the Issuer. Prior to maturity, the price may be less than the amount the holder would have received on maturity of the investment.
Tax risk
The tax treatment of structured products can be complex and tax rates and regulations may change during the term of this investment. Guidance is given here, but if in any doubt investors should seek their own professional tax advice.
Time horizon
Whilst an investor might be happy with the capital erosion prospects at maturity, the reference index/indices may fall throughout the life of the security and the security might fall by more than you would expect.
Important information
This is a marketing communication and has not been prepared in accordance with legal requirements designed to promote independence of investment research and is not subject to any prohibition of dealing ahead of the dissemination of investment research. The information in this document is derived from sources believed to be reliable but which have not been independently verified. Any prices included within this communication are for indicative purposes only. Atlantic House Group Limited makes no guarantee of its accuracy and completeness and is not responsible for errors of transmission of factual or analytical data, nor is it liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgment of Atlantic House Group Limited, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. This document is intended for the use of institutional, eligible counterparties and professional clients and is not intended for the use of private customers. This document is not intended for distribution in the United States of America or to US persons. This document is intended to be distributed in its entirety. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Atlantic House Group Limited is a private limited company registered in England and Wales, Registered Office: One Eleven Edmund Street, Birmingham, B3 2HJ. Registration Number: 09770730, Atlantic House Group Limited is authorised and regulated by the Financial Conduct Authority, FCA Reference: 719605.