Norwich Union has entered the guaranteed bond market with prosper, a guaranteed equity bond that has a four-year term.
Prosper is linked to the FTSE 100, with the four-year investment term starting on March 5, 2002. Investments made before February 11 will receive a bonus of 0.35 per cent and those who invest between February 11 and March 1 will get a lower bonus of 0.15 per cent.
Investors get their capital back in full, however the FTSE 100 index performs during the term. To calculate the final return, the FTSE 100 index is recorded every six months and any rise or fall will be capped at 6.5 per cent, then added together at the end of the term.
An unusual feature of this bond is its four-year term, as similar guaranteed products tend to have either a five-year or three-year term. Recent examples of this are Keydata Investment's secure growth portfolio II and Scottish life International's select income and growth bond respectively.
Prosper strikes a positive note for cautious investors in that the capital guarantee is unconditional, so there will be no loss to capital if the FTSE fails to meet a certain level of growth by the end of the term. The four-year term may also be better placed than a three year product to benefit from tracking an index, as stockmarket investments are designed for longer-term investing.
However, the method of calculating the return means every half-yearly movement in the index has an effect on the final return, whether this is good or bad news for the investor. The effect of the cap is a double-edged sword in that it cushions investors from large falls, but does not pass on the full extent of capital growth if the index rises by more than 6.5 per cent in any six-month period.