CMFAS CM-SIP Structured Products & Structured Notes question: cash after

CMFAS CM-SIPStructured Products & Structured Notes

David bought a 5-year 100% capital-protected note but needs his cash after 18 months. Which statement is MOST accurate?

A He is guaranteed at least his full principal, because the note is 100% capital protected whenever he sells
B Protection applies only at maturity, so an early sale can be at a price below par and crystallise a loss
C The issuer is obliged to redeem the note at par on demand, less a small administrative early-exit fee
D Deposit insurance will make up any shortfall between the early sale price and his original principal

Show the answer and explanation

Answer: B. Protection applies only at maturity, so an early sale can be at a price below par and crystallise a loss

Capital protection applies only at maturity; early exit is at an issuer/market-maker price often below par, especially early in the life of the product, so selling early can turn a 'protected' product into a real loss.

Common mistake

Believing capital protection guarantees principal even on early redemption.

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