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NDF explores income generation

NDF Administration has established the income plan February 05, a guaranteed equity bond that provides a level of income which depends on the performance of the FTSE 100 index.

The bond has a six-year term and will offer a full capital return to investors regardless of the performance of the index. However the income will vary depending on the performance of the FTSE 100. If the index is never more than 10 per cent higher or lower on any business day during each year of the term, 9 per cent income will be paid for that year. Otherwise, investors will get the minimum 3 per cent income for that year.

Most guaranteed equity bonds are designed for capital growth and he few that provide income usually offer soft protection whereby the return of capital is dependent on the performance of one or more indices.

As an income product with full capital protection, NDF appears to have ticked all the boxes for cautious investors who are looking for income.

However, current pricing conditions make it difficult to provide a regular income above cash returns with little risk to capital. This product can only offer a full capital return because there are conditions attached to the maximum income return of 9 per cent a year.

Achieving the maximum return of 9 per cent every year plus a full capital return may be difficult because the index must never rise or fall by more than 10 per cent a year on any business day for every year during the term.

Any volatility in the FTSE 100 will jeopardise investors chances of capturing the maximum return in any one year and investors could end up taking away the minimum income return more frequently during the term than they would like.

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