NDF Administration has introduced the second issue of its recovery growth plan, a guaranteed equity bond that allows investors to receive 100 per cent of any rise in the FTSE 100 index over a five-year term.
Investors will also get their original capital returned in full unless the FTSE 100 index falls by more than 50 per cent during the term without recovering to at least its starting value by the end of the term. The starting value of the index is defined as its closing value on May 29, 2002. This is compared to the final level, which is the lowest closing level of the index between April 29 and May 30, 2007.
If the index falls by more than 50 per cent and fails to recover by the end of the term, investors' capital is reduced by 1 per cent for each 1 per cent fall in the index.
Some five-year guaranteed equity bonds such as National Savings and Investments' recent offering, provide 100 per cent capital protection whatever happens to the chosen index. The NDF product is riskier because the capital guarantee is dependent on the index reaching a certain level in five years' time.
However, the National Savings and Investments bond caps the final return at 65 per cent of any growth in the FTSE 100. The NDF bond compares favourably in this respect as growth is not capped. Investors trying to choose between them will need to decide how much capital protection they need and whether they are prepared to give up 35 per cent growth potential with National Savings and Investments.
Some may do so in return for greater capital protection than is offered by NDF Administration's bond. But others may feel that NDF Administration is the better option if the stockmarket is entering a recovery period over the next five years.