PRINCIPAL PROTECTED NOTES - Don't be wooed by the hype.

CIBC call 'these things' Premium Income Generation Deposit Notes and their ad in the Kingston Whig Standard on Feb 21 2007 claimed a “Guaranteed coupon of 6% payable in Year 1” This seems terrific: 6% in year one is indeed tempting. But that might be all you get: 6% first year and nothing at all in years 2, 3, 4 and 5. The small print in the ad says it all. And they love the word 'potential'. The ad continues: “Potential coupons up to 10% in Years 2 to 5 based on the price performance of 10 companies”. Notice too that guarantee of your money back is at maturity…five year from now.

http://www.osc.gov.on.ca/About/CSA/csa_20060707_investorwatch-ppn.pdf

http://www.fundlibrary.com/research/content/structuredproducts.pdf

For some terrific information on principal protected notes, follow the above links.

Do not buy principal protected notes. In fact, if a planner trys to sell your one, get rid of that advisor. They're a rip! Rob Carrick's Report on Business column on PPNs of Tuesday March 14 was great too. https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20060314/RCARRICK14

My thoughts, briefly: Your principal is protected, but not from inflation. You might not get any income from a PPN…or any gain, either. There's a penalty if you sell early. A secondary market may not exist so you might be effectively locked in for the duration…five to eight years. And it's all legal! Imagine buying an investment that does not pay income. That's like buying a common stock which does not pay a dividend:-). Think for a jiff: how are they going to guarantee your money back? And after that premium is paid, how much money is left to invest to earn a return. And billions of dollars of these 'things' have been sold. The commissions are high…it's that simple. What a world! One can't help wondering: if principal protected notes are likely to be so profitable, why are these financial planners sharing the concept with us.

principal_protected_notes.txt · Last modified: 2008/10/16 12:46 (external edit)
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