About Principal Protected Notes
Meeting a Broad Range of Needs
While providing complete principal protection (if held to maturity), PPNs also offer exposure to the upside potential of growth-oriented investments such as equities. This unique set of qualities gives investors with diverse investment objectives the opportunity to enhance the risk/return profile of their respective portfolios:
- Notes allow risk-averse investors to increase the return potential of their portfolios without taking on additional risk to their principal
- Notes allow growth-oriented investors to reduce their portfolio's risk profile while still providing exposure to growth-oriented investments
However, since there is no guarantee that Notes will yield any interest and an investor may receive at maturity only the principal amount, an investment in Notes is not suitable for investors seeking a guaranteed interest yield.
How PPNs fit into a Diversified Portfolio
PPNs offer investors many potential benefits, combining the growth potential of equities with the principal protection of fixed income investments such as GICs and government bonds. They provide 100% (or more) principal protection by maturity while still offering the opportunity to participate in the positive performance of growth-oriented investments.
When attempting to position PPNs within a well-diversified portfolio, financial advisors must understand where Notes reside on the risk/return continuum:
The Risk/Return Continuum
In this illustration, investments on the left-end of the risk continuum offer low risk of principal loss. For the purpose of this discussion, risk is defined as the risk of loss of investor's original investment – their principal. The return potential of the various investment categories is indicated by the size of their respective circles. The larger the circle, the greater the potential return.
As you can see, PPNs occupy a distinctive space on the continuum – offering a level of security that is analogous to GICs, but with the potential for significantly higher returns.