Abbey National's online bank Cahoot has released a guaranteed equity bond on to the market which guarantees the return of investors' original capital and minimum growth of 12 per cent.
The bond is linked to the FTSE 100 index over a three-year term and gives a maximum return of 50 per cent. To calculate the level of return, the closing level of the FTSE 100 is taken on August 1, 2002. This is measured against an average of the daily closing levels of the index between January 31, 2005 and July 31, 2002.
If there is no growth, investors will only get the minimum returns and their original capital back. But if the index has increased, investors get 50 per cent of this growth.
The guaranteed minimum above the return of original capital makes this bond more attractive to investors who are reluctant to take stockmaket risks, but who are not getting enough interest from building society accounts. The bond is unusual because most guaranteed equity bonds that offer a full capital guarantee have a five-year term. Products with a shorter term tend to be riskier bonds that offer a conditional guarantee, such as GE Life's high income and growth plan.
A shorter term may be useful for investors who do not want to tie their money up for five years or more. But a potential downside is that they are exposed to short-term movements in the stockmarket. This may not trouble investors who think share prices will rise, but they may decide it is pointless to invest if growth is capped at 50 per cent.