Britannia Building Society has introduced a five-year capital guaranteed equity bond which tracks the FTSE 100 index.
The bond guarantees the return of investors' original capital even if the FTSE 100 index falls below its the starting value by the end of the term. If the closing level is the same as the starting level or higher, investors get a return of 37.23 per cent gross.
There are three start dates October 26, 2001, December 5, 2001 and January 15, 2002. Investors capital will be invested in the bond at the earliest opportunity and investments made earlier will accrue interest at 6 per cent gross a year before the next available start date commences.
Many companies are offering variations of stockmarket-linked bonds at the moment because investors are reluctant to take higher risks with their capital while the stockmarkets are still at a low point. Alliance &Leicester's five-year stockmarket bond also tracks the FTSE 100 index for five years, but guarantees the return of capital and growth of at least 20 per cent however the index performs.
Britannia's guarantee does not extend to a minimum level of growth and its maximum growth potential is lower than the 60 per cent possible with Alliance & Leicester.
However, the final returns of the bonds are calculated differently. Alliance & Leicester's bond is based on the average level of the index each year during the term and Britannia's is simply based on the average level at the start date and closing date. This suggests volatility during the term may have more of an impact on the final returns with Alliance & Leicester than with Britannia.
The FTSE 100 index rose from 3907.50 points on August 23, 2001 to 5396.53 points on August 23, 2001.