Principal at risk notes
What are Principal at Risk Notes?
Ending Value Higher
Benefits of PARs
* Enhanced/Leveraged Return
** Upside: Receive a return that is enhanced by leverage so that it will be higher than the actually return, subject to any caps.
** Downside: Losses are not magnified by the leveraged component, and some downside protection may be offered however is the reference asset is off significantly the investor will be subject to loss of principal.
* No requirement for Option Approved accounts.Replication of this strategy would require the use of options. While investors do not need to be option approved they should have a fundamental understanding of option strategies.
* One transaction as opposed to many.Replication of this strategy would require a number of transactions to leverage the upside exposure to the underlying asset. An investment in these notes is a single transaction.
Risks of PARs
* An investment in PARs may result in a loss. Investing in PARs involves risks similar to investing directly in the underlying asset, including a risk of a loss in the investment. Because the value of the PAR is directly related to the level of a particular underlying asset, an investment in the Notes may result in a loss to the investor if the level of the underlying asset declines.
* An investor’s return on PARs may be limited. The opportunity to participate in the possible increases in the level of the underlying asset through an investment in PARs may be limited if the issue has a Capped Value. However, in the event that the level of the underlying asset declines over the term of the Notes, an investor will realize the entire decline.
* Liquidity of exchange listed PARs.Investors should be aware that the listing or quotation of PARs does not necessarily ensure that an active trading market will develop. The potential limited trading market may affect the price that an investor receives for the Notes if they are not held until the maturity date.
* Liquidity of OTC traded PARs.Although HRBFA expects to make a market, it is not required to do so and may cease making those bids at any time. The limited trading market may affect the price that investors receives if they wish to sell prior to maturity.
* Trading Value of PARs may be affected by complex factors.The effect of one factor may offset the increase in the trading value of the PARs caused by another factor. Conversely, the effect of one factor may exacerbate the decrease in the trading value of the Notes caused by another factor. In addition, there are other factors described in the pricing supplement which include:
** The level of the underlying asset
** Changes in the levels of relevant Interest Rates
** Changes in the volatility of the underlying asset
** The credit rating of the Issuer.Basically, PARs are designed to be held to maturity by the investor. If the investor sells the Note prior to maturity, the value may be different than the investor’s perceived value due to the Risks identified above.
* It is highly recommend to have your clients seek professional tax advice.
* PARs should be characterized for all tax purposes as a pre-paid cash-settled
forward contracts linked to the level of the underlying asset.
* A U.S. holder’s tax basis in a note will equal the amount paid by the holder to acquire the note.
* Upon receipt of cash on the maturity date of the notes, a U.S. holder will recognize a gain or a loss and the amount of such gain or loss will be the extent to which the amount of cash received differs from the U.S. holder’s tax basis in the note. It is uncertain whether any such gain or loss would be treated as ordinary income or loss or capital gain or loss.
* Upon the sale or exchange of a note prior to the maturity date, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or exchange and that U.S. holder’s tax basis in the note.
Investor Suitability Profile
* Investors seeking exposure to an individual or basket of indexes, stocks or exchange rates and who believe that the level of that underlying asset will moderately increase over the term of the PAR.
* Investors who intend to hold the investment to maturity.
* Investors who are prepared to risk some or all of their principal.
* Investors who do not need income and are willing to forego this in exchange for the potential of leveraging their initial investment.
* Investors comfortable with the risk of receiving less than the initial investment if the level of the underlying asset decreases over the term of the note.
* [http://www.usstructuredinvestments.info US Structured Investments] - A public website that acts as a portal for information on structured investments created for the US market. A free service that does not require registration.
* [http://www.structuredproducts.org Structured Products Association] - The official global website of the 2,300-member Structured Products Association, the New York-based trade association for the structured products community.
* [http://www.usstructuredproducts.info US Structured Products] - A public website that acts as a portal for information on structured products created for the US market. A free service that does not require registration.
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