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Online bank in Cahoots with bond

Cahoot, the online banking arm of Abbey National, has introduced a guaranteed equity bond that is linked to the FTSE 100 index during a three-year term.

The 3-year FTSE guaranteed return bond is available to investors with between £500 and £250,000. If they invest before the investment term starts interest is paid at 6 per cent gross until December 3, 2001. The starting level of the FTSE 100 index is also recorded on this date and the closing level is taken as an average between June 2, 2004 and December 2, 2004.

Investors are offered the return of their original capital and a return of 12 per cent if the final level of the index is the same as the starting level or lower. However, if the index rises during the term investors get their original capital back plus 50 per cent growth.

There is a demand from investors for this type of product as interest rates are low and investing in stocks and shares without the cushion of a capital guarantee may be too risky for cautious investors. This bond occupies the lower end of the risk scale as it guarantees a minimum return on top of the original capital, but there is a downside.

The final return is based on a six-month average at the end of the term, which benefits investors if performance dips, but it also means investors cannot take full advantage of any sharps peaks that occur. In addition, growth is limited to 50 per cent, which may not be high enough for some investors.

According to FTSE, the FTSE 100 fell from 5093.525 points on September 28, 1998 to 4903.390 points on September 28, 2001.

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