CMFAS CM-SIP Structured Products & Structured Notes question: Q pays

CMFAS CM-SIPStructured Products & Structured Notes

Two notes reference the SAME index over the SAME tenor from the SAME issuer. Note P is 100% capital-protected; Note Q pays a much higher coupon and is capital-at-risk. Which inference is MOST accurate?

A Note Q is safer, because the issuer would only pay a higher coupon on a lower-risk note
B Note P must have sold options to fund its 100% protection, so P puts more capital at risk
C The two notes carry identical overall risk, because the issuer, index and tenor are all the same
D Note Q's higher coupon pays for downside risk taken on (optionality sold), so it puts more capital at risk

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Answer: D. Note Q's higher coupon pays for downside risk taken on (optionality sold), so it puts more capital at risk

A yield well above the protected alternative signals extra risk taken on, usually optionality sold away; the higher advertised yield on Note Q means more capital at risk, even though issuer credit risk is common to both.

Common mistake

Treating a higher coupon as safety, or assuming identical issuer/underlying means identical overall risk.

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Original study material mapped to the public CMFAS CM-SIP syllabus. Unofficial, not endorsed by MAS or IBF. Verify figures and rules against current guidance before relying on them.