Citibank has designed an offshore guaranteed equity bond that is linked to the S&P 500 index during a three-year term.
The bond is only available to investors who have an account with Citibank. It guarantees the return of the original capital, regardless of the movement in the S&P 500 during the term, plus minimum growth of 6 per cent gross. But investors have the opportunity to get higher returns, as they get 60 per cent of any rise in the S&P 500 index.
To calculate the returns, the level of the S&P 500 is recorded on May 10, 2002 and the closing levels of the index are then recorded on a quarterly basis throughout the term. The start date is compared with the average quarterly level of the index and investors get 60 per cent of any rise. If there is no growth in the index, investors will get the 6 per cent minimum returns and their original capital back.
The bond is likely to appeal to cautious investors who want to benefit from an expected US recovery, but who also want to protect their capital from the risks of direct investment in US stocks if recovery is slower than expected.
However, the bond's appeal could be limited because a three-year term may not be long enough to ride out the uncertainty leading up to a recovery and the cap on growth may also put some investors off.1