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Capital Protection Notes

What are CPNs?

 

CPNs, or Capital Protection Notes, are hybrid financial instruments belonging to the family of structured products.

 

Simply put, they are investments that protect your initial capital (in whole or in part) and offer a potential return linked to the performance of one or more assets (stocks, indices, currencies, raw materials).

 

Their main feature is that, at maturity, you recover at least the amount invested (or a minimum established percentage), regardless of how the market has performed — but you could also earn if the reference stock has moved in a favorable direction.

How Do CPNs Work?

 

A CPN is composed of two main parts:

  • Guaranteed capital bond: guarantees the repayment of the capital at maturity.

  • Derivative (option): linked to the performance of an underlying asset, and determines the variable return.

 

For example:

  • Invest 10'000 CHF in a CPN linked to the S&P 500 index

  • Expiry: 3 years

  • Protection: 100% of capital

  • Potential return: +20% if the index rises by 20% or more

 

Possible scenarios at maturity:

  • If the index rises ≥ 20%: you receive 12'000 CHF

  • If the index is unchanged or falls: you still get your 10,000 CHF (no loss)

CPNs Key Characteristics

 

Capital Protection

  • Typically 100%, but some offer partial protection (e.g. 90%, 80%)

 

Duration

  • Typically 1 to 3 years

 

Underlying Asset

  • Stocks, indices, rates, currencies, commodities, baskets of securities

 

Yield

  • Fixed or conditional on the performance of the asset

 

Risk/return profile

  • More cautious than stocks, more dynamic than bonds

Benefits of Investing in CPNs

 

  • Capital Protection : Ideal for those who fear losses, but want higher returns than government bonds

 

  • Attractive potential yield: Opportunity to make money if the underlying asset moves in your favor

 

  • Diversification: They expose to equity or thematic markets with controlled risk

 

  • Tailor-made solution: Can be designed based on time horizon, risk profile and preferred market

 

  • Tax flexibility: In some countries, the tax treatment may be more favorable than other instruments

Main Risks

 

No guaranteed return

  • If the underlying does not behave as expected, you may receive only the principal (without gain)

 

Yield “cap”

  • There is a maximum cap on the gain (you do not participate in the entire increase of the underlying)

 

Issuer risk

  • If the issuer of the note (typically a bank) goes bankrupt, you may not receive a refund.

 

Liquidity risk

  • In some cases, it may be difficult to sell the note before maturity.

 

Complex structure

  • Requires understanding of the mechanisms to be assessed correctly

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