I remain woefully ignorant regarding specific investments like Corporate bonds/notes, since I invest almost exclusively in mutual funds. However, since there are several of these type of investments in my Mom's Trust accounts that I don't manage, I would really like to have at least a VERY basic understanding of Corporate bond/note investments. (I'm really glad MFO has "off-topic" category as I wouldn't have asked otherwise and have really appreciated the valuable input I've received).
My question is: If a corporate bond/note states 4.5% (Fixed) as Disney below indicates, does that mean that this investment guarantees a 4.5% ?ANNUAL return during the stated validity periods?
Examples: Disney 254687AW6 4.5% = will pay 4.5% every year from its Mar 2009 inception to its end date of 12/15/13?
Last one is different. Says JPMorganStructured EFA 200% EFA 24 mos. ?Zero Coupon? Name sound like it pays out 200% of EFA Intl Market (MSCI EAFE) index? This investment has DECREASED in value from inception (Dec 2009) to now and ends 12/30/11, so does that mean they were making a bet that these markets would grow during this time - but lost the bet?
Comments
Re JPMorgan. The listing in my statement just lists this under "Corporate Issues" as " Medium Term Note 12/30/2011 Zero Cpn", so I guess I assumed that meant the note ended on that date. But, again, I know absolutely nothing about this. I'll check out your site reference - thanks again.
http://si.jpmorgan.com/products/catalogue/index.html?ck=en_US
What I see there are three CUSIPs that come close to matching your description:
2 Year BREN (Buffered Return Enhanced Note) linked to EFA, 200% participation, various max returns, and various buffers:
CUSIP Max Return Buffer
48124ACW5 24.00% 10%
48124ADJ3 24.00% 10%
48124ADZ7 26.40% 15%
The "maturity" dates listed in JPMorgan's table of products is 12/27/11, because that's the date they use to evaluate the index value. According to the prospectus, the actual maturity is 12/30/11.
The pricing supplement for the first (I expect all to be the same except for the numbers above) is at: http://si.jpmorgan.com/content/41228.pdf
The return is a fairly straightforward calculation. These notes look at the closing price of EFA (the ETF index fund, not the EAFE index itself) on 12/27/11, compare it with the closing price of $54.85 on the pricing date (12/22/09), and figure out the percentage gain. (Dividends not included.) For example, if the closing price on 12/27/11 is $57.00, then the percentage gain on EFA is: 3.92%, i.e. (57 - 54.85)/ 54.85.
The return you get on the note is double that (this is the 200% participation). In this example, 7.84%, so you'd get $107.84 for each $100 invested. Your gain is capped at 24% (for two of the CUSIPs), meaning that if EFA goes up more than 12%, you'll only get 24%, or $124 for every $100 invested.
The buffer gives you some downside protection. If the EFA drops, you'll still get the original investment so long as it doesn't drop more than the buffer amount (10% or 15%). After that (if the EFA fund drops more than 10%), you lose 1% for each extra percent EFA loses. For example, if the EFA dropped 12%, then you'll lose 2%; if it dropped 15%, you'll lose 5%. So even though you get double the gain (if EFA goes up), you lose only 1x the loss (if EFA goes down), and only after it drops 10%.
Obviously you'll have to check the CUSIP to see exactly which note you have, and which set of numbers applies.
But, your very understandable explanation is so clear to me that this answer is really all I was looking to find - buffers on losses and 200% of gains with maximum caps seems to me like a pretty good bet overall as if that market ends up down (as it is so far), your losses are still less than the Index. THANK YOU!