Merrill Lynch has introduced the FTSE 100 stepped growth & income investment, a capital protected bond offering a choice of income at 8 per cent a year or growth of 70 per cent after seven years.
The bond returns the original capital to investors unless the FTSE 100 falls by more than 39 per cent by the end of the term. If it does, capital is reduced by 1 per cent for every 1 per cent fall in the index.
Investors who are looking for income with some degree of capital protection could find this attractive. Growth investors who are not prepared to invest in bonds with a higher level of capital protection but lower returns, may also find this appealing. It could also be used as an alternative to zero dividend preference shares in the light of their recent poor performance.
Unlike some capital protected products which calculate the returns by averaging out the closing levels of the index over the final year, this product compares the starting level with the closing level on a single day in 2009. This means that even if the FTSE rises for most of the term, investors could suffer capital erosion if the final day of the term coincides with a sharp dip in the index.
The product sits at the riskier end of the capital protected spectrum, but some investors may feel it is unlikely that the index will fall at least 40 per cent below current levels in seven years' time, bearing in mind that share prices are still quite low.