Morgan Stanley's latest addition to the structured product market is a capital-protected bond, which provides annual income over a three-year term.
The FTSE 100 income plan provides a single option of 6.5 per cent income a year but the degree of capital protection is dependent on the performance of the index. Investors will get their original capital returned only if the index never falls by more than 30 per cent at any point during the term. When calculating the returns, the closing level of the FTSE 100 index is taken on November 18, 2003 and compared with the closing level on November 18, 2003.
Even if the index falls beyond 30 per cent and subsequently recovers by the end of the term, capital is automatically reduced by 10 per cent. Then an additional 1 per cent reduction for every 1 per cent fall in the index below the starting level is made, which could wipe out all the original capital.
Morgan Stanley's offering stands out from the current crop of structured products by producing annual income over a short period. Other products with a three-year term such as Standard Life's three-year guaranteed bond, are focused only on growth.
Norwich Union's fixed income plan is a more conventional five-year FTSE-linked bond which offers a choice of annual, monthly or rolled-up income at the end of the term. The 5.75 per cent annual income it offers is lower than that offered by Morgan Stanley but it will be paid for two more years.
Like the Morgan Stanley bond, capital is at risk if the FTSE 100 index falls by 30 per cent or more.
However, the capital protection is slightly less stringent because if the index falls beyond this point then recovers by the end of the term, investors get a full capital return.