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How Structured Notes Work
 

How CIBC Principal Protected Notes Work

To understand how CIBC Principal Protected Notes work, consider the CIBC International Index- Linked Deposit Notes, Series 4. In this example the underlying assets are international equity indices. However, in general other assets such as stocks, commodities, mutual funds, currencies, and interest rates can also be used in this structure. Their simple structure illustrates the basic elements of many CIBC Principal Protected Notes.

 


 

If the price return of the underlying international indices is positive at maturity, investors will receive 100% of that return. The principal is fully protected, so even if the indices fall in value (that is, the portfolio return is negative), investors will still receive the original amount of their investment (that is, the full principal amount) at maturity. As the PPNs are denominated in Canadian dollars, any fluctuation in the value of the foreign currency against the Canadian dollar will have no direct effect on the investment.

These three possible scenarios illustrate what kind of returns may result from this PPN structure, assuming an initial investment of $5,000.

 

 

The hypothetical returns used in the above examples are included for illustration purposes only and are not estimates or forecasts intended to predict future results. Actual returns will vary, depending on the performance of the underlying assets.

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How CIBC Principal at Risk Notes Work

To understand how a Principal at Risk Note works, consider the example of a note that features an enhanced return structure. With CIBC Enhanced Return notes, the return at maturity is based on the positive performance of the underlying assets, multiplied by a participation rate of more than 100%. These notes offer leveraged positive returns with no increase in downside risk as compared to investing in the assets directly.

The return can be linked to the performance of a portfolio of one or more foreign and/or domestic equity indices, such as the S&P 500®, S&P/TSX 60, and Dow Jones EURO STOXX 50®, without foreign currency risk. However, in general other assets such as stocks, commodities, mutual funds, currencies and interest rates can also be used. If the return on the underlying portfolio is negative at maturity, the return on the note will be equal to the price return of the portfolio. The most an investor can lose is 100% of the amount they originally invested.

The example below shows the maturity amount (principal and interest) per note that an investor could receive on a $100 principal investment for a Principal at Risk Note with a participation rate of 130% under a number of different scenarios.

 

 

To obtain similar returns by investing directly in the portfolio of indices, an investor would need to provide a greater amount of principal up-front than is needed to invest in a Principal at Risk Note with an enhanced return feature.

In addition to providing enhanced returns, Principal at Risk Notes can be structured with other objectives in mind to take advantage of any market view:

  • Returns can be based on the price decline in the underlying basket of assets, thereby enabling investors to earn a positive return in a declining (bear) market.
  • Returns can be based on the price of the underlying basket moving above or below a specified level, thereby enabling investors to generate returns in a range-bound market.

The hypothetical returns used in the above examples are included for illustration purposes only and are not estimates or forecasts intended to predict future results. Actual returns will vary, depending on the performance of the underlying assets.


Please refer to the Legal Notice link below for important information regarding Principal at Risk Notes.

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