Keydata Investment Services has established a fourth issue of the extra income plan, a guaranteed equity bond linked to the FTSE 100 index during a five-year term.
The bond initially offers investors a choice between two options. Option one provides a further choice of 8 per cent income a year, 1.93 per cent income a quarter or growth of 43 per cent at the end of the term. Alternatively, investors can choose income of 6 per cent a year, income of 1,44 per cent a quarter or 32 per cent growth at the end of the term under option two.
Investors will get all their original capital back whatever option they chose provided the FTSE 100 index never falls by more than 40 per cent between May 19, 2003 and May 19, 2008. Where the index breaches this safety net without recovering, investors will lose a percentage of their capital.
With option one investors will lose 2 per cent for every 1 per cent fall in the index, which means no capital will be returned if the index falls by more than 50 per cent. Option two means investors will lose 1 per cent for every 1 per cent fall in the index.
This product is one of the more complicated, riskier guaranteed equity bonds. Although it offers a range of options to suit investors' objectives and risk profiles, this increases its complexity.
In addition, investors' capital is not completely protected and the price option two investors pay for higher returns than option one investors is a greater degree of capital loss if the safety net fails. This suggests the product may only be suitable for sophisticated investors who understand that capital protection does not necessarily mean low risks.