The defined returns plan is linked to the performance of the FTSE 100 index. Investors who choose the five-year option will receive their original capital back regardless of the index performance, plus 45 per cent growth. Investors in the three-year option receive a full capital return plus 21 per cent at the end of the term.
The five-year annual kick out option differs from the other options in that it has the potential to mature early. Instead of full capital protection, soft protection is offered. This means a full capital return is made provided the index does not fall by more than 50 per cent without returning to at least its original value by the end of the term.
Investors in the kick-out option will receive 8.5 per cent in year one if the closing level of the index is the same or higher than the starting level. If it is, the bond will mature and if not, it will roll over to year two. In year two a 17 per cent return will be payable if the same conditions are met. If they are not, the bond will roll over again to provide 25.5 per cent in year three, 34 per cent in year four or 42.5 per cent in year five.
To calculate the returns, the closing value of the index is taken on October 12, 2007 and measured against the same date at the end of the term in the cases of three and five year option. For the kick-out option, the index level is taken at each anniversary throughout the term to work out if early maturity applies.
The potential drawback of the annual kick out option is there is no certainty as to when it will mature, so will be unsuitable to those who are investing for a specific purpose and time horizon. There is also a potential risk to capital of 1 per cent loss for very 1 per cent falls in the index if the 50 per cent soft protection is breached.
There is no averaging at the end of the term for all three options, so investors are also at risk of missing out where good performance occurs in the middle of the term, as the returns are calculated on the basis of comparing performance on two single days.