A principal-protected structured note trades away some upside (often via a cap) for full downside principal protection, packaged with a participation rate that can exceed 100% of the underlying’s gain.
How it works
The participation rate is applied only to a positive underlying return; if a cap applies, the resulting gross return is capped before being applied to the principal to find the payoff at maturity.
What this does not include
This does not include issuer credit risk — a structured note’s “principal protection” is only as good as the issuing bank’s ability to pay, unlike FDIC-insured deposits, and note holders bear that counterparty risk.
How to use this calculator
- Enter principal, participation rate, underlying index return, and an optional upside cap.
Frequently asked questions
Why would an investor accept a cap on their upside?
The cap (along with giving up dividends the underlying index would otherwise pay) is part of what funds the principal protection and the above-100% participation rate — there’s no free lunch in the structure.
What happens if the underlying index falls?
With full principal protection, the investor gets back their original principal regardless of how far the underlying falls, at the cost of giving up any potential downside “buying the dip” gain a direct index investment might have captured.
Can structured notes be sold before maturity?
Yes, but often only through the issuing bank at a price that can differ meaningfully from the note’s theoretical value, and liquidity is typically much lower than for a comparable ETF or mutual fund.
