Independent Financial Adviser Chartwell Direct has teamed up with AIG Life to create the extra income bond.
This guaranteed equity bond is linked to the Eurostoxx 50 index and has a five-year term. It allows investors to choose between income at 7.25 net a year, 0.585 per cent net a month or growth at 42 per cent net at the end of the term.
Original capital will be returned to investors unless the index falls by more than 30 per cent during the term and does not recover to at least its starting level. If this occurs, capital is reduced by 1 per cent for every 1 per cent fall in the index.
The Eurostoxx 50 index was chosen because Chartwell wanted to track a mainstream index, but felt the returns of this index would be higher than the FTSE 100 or S&P 500.
Some bonds like Scottish Mutual's income bond have a shorter term of three years and are linked to a basket of stocks across one or more indices. This may concentrate the risks as the final returns are based on fewer stocks over a shorter investment period.
In comparison to the Scottish Mutual bond, the Chartwell bond is not as risky, but its headline rates are lower. The Chartwell bond does not require a complicated list of conditions to be met before the returns are calculated and the capital is returned. However, there is still a risk of capital erosion and income seekers would need to understand this.
The Eurostoxx 50 index rose from 2914.00 points on September 10, 2001, to 3383.65 points on September 10, 2001.