Yield Enhancement Certificate with Additional Credit Risk
A reverse convertible whose coupon is boosted by selling protection on a reference entity.
Payoff at maturity
Move the parameters; the product formula and its building blocks are recomputed from the same engine that is tested against the workbook.
- No credit event
Redemption 109 %
Per 10'000 of nominal
| Underlying at maturity | Level | Redemption | Amount | Gain / loss |
|---|---|---|---|---|
| −30 % | 70 % | 79 % | 7'900 | −2'100 |
| unchanged | 100 % | 109 % | 10'900 | +900 |
| +30 % | 130 % | 109 % | 10'900 | +900 |
Coupons are shown as paid at maturity together with the nominal. Costs, taxes and the price you paid are not included. Scenario: No credit event.
Data table and formulas
Yield Enhancement Certificate with Additional Credit Risk (1420), scenario "No credit event": redemption at maturity for an underlying at 0 % → 9 %; 9 % → 18 %; 40 % → 49 %; 100 % → 109 %; 200 % → 109 % of its initial level.
| Series | Formula | 0 % | 25 % | 50 % | 75 % | 100 % | 125 % | 150 % | 175 % | 200 % |
|---|---|---|---|---|---|---|---|---|---|---|
| Zero Bond | 100 + coupon | 109 | 109 | 109 | 109 | 109 | 109 | 109 | 109 | 109 |
| Short Credit Default Swap - Reference Entity | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Short Put - ATM | −(100 ÷ strike × max(strike − S, 0)) | -100 | -75 | -50 | -25 | 0 | 0 | 0 | 0 | 0 |
| Product | if S ≥ strike: 100 + coupon; otherwise 100 × S ÷ strike + coupon | 9 | 34 | 59 | 84 | 109 | 109 | 109 | 109 | 109 |
Largest difference between the sum of the blocks and the product formula over the grid: 0.0e+0.
How it is built
Each block drawn on its own, then added. The last chart is the sum, and it is identical to the product line above.
- Zero Bond100 + coupon
- Short Credit Default Swap - Reference Entity0
- Short Put - ATM−(100 ÷ strike × max(strike − S, 0))
- Product: no credit eventif S ≥ strike: 100 + coupon; otherwise 100 × S ÷ strike + coupon
Largest gap between the sum of the blocks and the product formula on this grid: 0.0e+0. The same identity is tested for every product and scenario in the site's test suite.
Construction, as listed in the workbook
- Zero Bond (face = nominal + coupon)
- Short Credit Default Swap - Reference Entity (Zero Bond + Short CDS = synthetic Reference Bond)
- Short Put - ATM
- Variant with barrier: replace the Short Put - ATM by a Short Down and In Put - ATM (as in 1230)
In plain English
A reverse convertible (zero bond plus short put) with the zero bond swapped for a synthetic reference bond. The CDS premium and the put premium together finance a coupon above that of a plain reverse convertible.
Without a credit event the payoff is that of a reverse convertible. With a credit event the workbook assumes only the recovery value is paid. A barrier variant replaces the short put with a short down-and-in put, exactly as in 1230.
Chances and risks
Chances
- Highest coupon of the yield-enhancement family.
- Same behaviour as a reverse convertible if the reference entity stays solvent.
Risks
- Equity risk below the strike plus credit risk on the reference entity.
- Recovery value after a credit event.
- Issuer credit risk on top.
Who it fits
- Investors who want income and are comfortable with two risk sources.
Who it does not fit
- Anyone who cannot explain what the reference entity is.
Features that can be added
Cross-category features from the workbook that issuers attach to this type.
Nearby on the map
- 1400Additional Credit RiskCredit Linked Note
A bond-like note whose coupon and repayment depend on a reference entity not defaulting.Credit risk - 1410Additional Credit RiskCertificate with Conditional Capital Protection and Additional Credit Risk
A capital protection note whose protection depends on a reference entity not defaulting.Credit risk - 1430Additional Credit RiskParticipation Certificate with Additional Credit Risk
A tracker funded by a synthetic reference bond: full equity exposure plus credit risk, in exchange for better terms.Credit risk