Equity-Linked Note (ELN)

An equity-linked note combines the characteristics of a zero or low coupon bond or note with a return component based on the performance of a single equity security, a basket of equity securities, or an equity index. In the latter case, the security would typically be called an equity index-linked note. Equity-linked notes come in a variety of styles. The minimum return may be nil with all of what would normally be an interest payment going to pay for upside equity participation. Alternatively, a low interest rate may be combined with a lower rate of equity participation. The participation rate in the underlying equity instrument may be more or less than dollar for dollar over any specific range of prices. The participation may be open ended (the holder of the note participates proportionately in the upside of the underlying security or index, no matter how high it goes), or the equity return component may be capped. Other things equal, a capped return will be associated with a higher rate of participation up to the cap price. Various versions of this instrument are known as capital Guarantee note, Equity-Linked Debt placement, Equity-Linked Certificate of Deposit (ELCD or ECD), Equity Participation notes (EPNs), Indexed notes, Index- Linked bonds or notes, Equity Index Participation note, Equity Index-Linked note, Equity Participation Indexed Certificates (EPICs), Index principal return note, All-Ordinaries share Price Riskless Index notes (ASPRINs), Geared Equity capital Units (GECUs), Performance Index paper (PIP), Customized Upside Basket security (CUBS), Structured Upside Participating Equity Receipt (SUPER), portfolio Income note (PIN), Market Index Deposits (MIDs), Market Indexed note (MINE), Market Index Target-Term security (MITTS), stock Index Growth notes (SIGNs), stock Index Insured Account, stock Index return security (SIRS), stock Performance Exchange-Linked bonds (SPELbonds), Guaranteed return Index Participation (GRIP), Guaranteed return on Investment (GROI) Certificate, Index Growth-Linked Units (IGLUs), Index Participation Certificate, Protected Equity note (PEN), Protected Equity Participation (PEP), Protected Index Participation (PIP), Safe return Certificate, or as a variety of 'money back' certificates. While the names may provide a clue to the structures, each issuer seems to have at least one proprietary name for some version of these instruments. Investors must look at the structure and pricing of the units offered and compare them with more familiar names and structures.

Similar financial terms

U.S. Treasury note
U.S. government debt with a maturity of one to 10 years.

Promissory note
Written promise to pay.

Project notes (PNs)
Project notes are issued by municipalities to finance federally sponsored programs in urban renewal and housing and are guaranteed by the US Department of Housing and Urban Development.

Notes to the financial statements
A detailed set of notes immediately following the financial statements in an annual report that explain and expand on the information in the financial statements.

Note issuance facility (NIF)
An agreement by which a syndicate of banks indicates a willingness to accept short-term notes from borrowers and resell these notes in the Eurocurrency markets.

Note agreement
A contract for privately placed debt.

Note
Debt instruments with initial maturities greater than one year and less than 10 years.

Municipal notes
Short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a bond issue, or other revenues.

Money market notes
Publicly traded issues that may be collateralized by mortgages and MBSs.

Medium-term note (MTN)
A corporate debt instrument that is continuously offered to investors over a period of time by an agent of the issuer. Investors can select from the following maturity bands: 9 months to 1 year, more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.

Liquid yield option note (LYON)
Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.

Bank anticipation notes (BAN)
Notes issued by states and municipalities to obtain interim financing for projects that will eventually be funded long term through the sale of a bond issue.

Deposit Notes
A term deposit in a bank. Deposit notes, like medium-term notes, may serve as the basis for an equity or currency-linked risk management structure.

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Did you know?

Open repo

A repo with no definite term. The agreement is made on a day-to-day basis and either the borrower or the lender may choose to terminate. The rate paid is higher than on overnight repo and is subject to adjustment if rates move.


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