Interest Rate Linked Notes

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Interest Rate Linked Notes

Most interest rate-linked products are principal-protected structured products. The index interest rate is based on the interest rates of domestic and foreign currencies. The product payoff mainly depends on the product structure and interest rate trends. Mostly the operating strategy of interest rate-linked product is to exchange and trade in the money market and interest rate market. Its structure is characterized by stable but not high returns and a long investment period, which is suitable for medium and long-term investors. Common related interest rates are as follows:

  • Interbank Offered Rate is a universal reference rate for lenders and bond issuers worldwide. It is also one of the most important and common market benchmark interest rates. Depending on the currency of the structured product, the interest rate can also be divided into those major interbank rates such as USD, Libor, EUR Libor, Hibor, or BSSW.
  • Constant Maturity Swap (CMS) is varied with regular interest rate swap. Common reference rates are CMS 10y, CMS 2y, CMS 30y, or the spread of interest rate swaps with different years as indicators.

Common Assets
Related Products
Interbank interest rate and constant maturity swap rates
Interest rate-linked notes, interest rate range accrual note

Precautions

Investors need to pay attention to the structure of the product and the risk of interest rate movement.

Main Risks

There are many types and forms of structured products. Investors should beware the following investment risks, including but not limited to:

  • Credit risk: The credit risk of the issuer or guarantor of a structured product. When the issuer or guarantor goes bankrupt or fails, even if it is a principal-protected product, the investment principal will still cause losses;
  • Liquidity risk: Structured products generally do not provide a secondary market. Due to the lack of a secondary market, investors cannot sell contracts before maturity. Therefore, investors can only enter into liquidation / unwinding transactions with the issuer, the price is determined by the issuer, and the transparency is low.

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