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Gilliat builds variable income

The April 2010 issue of Gilliat income builder is a FTSE 100-linked structured product that aims to pay a variable annual Income of up to 7 per cent during the investment term of six year and two weeks.

The income payment accrues daily so long as the index does not fall 40 per cent or more from its initial value. This works through a series of options that pay a fixed coupon of 0.027 per cent for every day during the term that the index is greater than 60 per cent of its initial value.  This means the maximum income possible during the term is 42 per cent and each annual payment will reflect the number of days in that year that the index is greater than 60 per cent of its initial value.

The product also has a 60 per cent capital protection barrier, so that investors will receive a full capital return at the end of the term provided the index does not fall by 40 per cent or more by the final day of the term. For capital protection purposes, index levels are measured only at the start and the end of the term, so its performance during the rest of the term does not affect the return of capital.

Gilliat has back-tested this product during all 5,119 six-year cycles that occurred between the inception of the index in January 1984 and March 26, 2010. It says the 60 per cent capital protection barrier has never been breached and that the product would never have paid less than 35 per cent income over any six-year period.

However, this does not mean it is impossible for investors to lose some or all of their capital, or receive less than 35 per cent income over the term, as the performance of the index cannot be predicted six years in advance. The variable nature of the annual income may also be unsuitable for some investors.

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