Market Linked Step-Up Notes on International Equity Basket priced on 10/24/2013.
This Market-linked Step up Note was priced by Bank of America for $10.00 totaling a public offering of slightly over $2.92 million. This note is based on an international equity basket with an 80% of the weight is based on MSCI EAFE Index and the rest in MSCI Emerging Market Index. The MSCI EAFE Index is an index made up of companies in developed nations other than the U.S. and Canada, whereas the MSCI Emerging Market Index is based on emerging global markets.
Advantages:
The advantage of this note is that it has three barriers that trigger different returns. Between $100 and $114.9 triggers a return of $11.49 or 14.90%. If the endings share value is above $114.90 than the return is based on the value at maturity by the set value of $100. If the ending is between $100 and $75 the return will be the initial investment of $100 due to the step-up feature. This means that everything below $75 is a loss of initial return.
Deconstruction:
To replicate the upside investors would first need a long 1 unit of basket digital call set at $100. Second a long 1 unit of basket vanilla call with a strike price of $114.90. For the down side investors would need to short 1 basket down-in put with a stock price of $100 and a strike price of $75. The basket would have 80% of the weight is based on MSCI EAFE Index and the rest in MSCI Emerging Market Index.
Risk ( Market and Credit):
It is critical to understand market risk is based on the correlated value of MSCI EAFE Index and the MSCI Emerging Market Index, with respect to their weights. The credit risk arises from BoA’s creditworthiness and the market risk arises from the equity basket performance. The step- up feature and upside call is to reward investors for take a 1-to-1 downside exposure is the value of the basket is beyond a 25% decline as well as forgoing interest payments. This indicates that the investors of this note are bullish individuals who believe only a small amount of downside protections is needed. This could be due to the weights associated with the two indexes in the basket and the correlation between the two is closer to 1 at .89 percent. Meaning they move in a similar manner so the returns would look the numbers displayed below.
This Market-linked Step up Note was priced by Bank of America for $10.00 totaling a public offering of slightly over $2.92 million. This note is based on an international equity basket with an 80% of the weight is based on MSCI EAFE Index and the rest in MSCI Emerging Market Index. The MSCI EAFE Index is an index made up of companies in developed nations other than the U.S. and Canada, whereas the MSCI Emerging Market Index is based on emerging global markets.
Advantages:
The advantage of this note is that it has three barriers that trigger different returns. Between $100 and $114.9 triggers a return of $11.49 or 14.90%. If the endings share value is above $114.90 than the return is based on the value at maturity by the set value of $100. If the ending is between $100 and $75 the return will be the initial investment of $100 due to the step-up feature. This means that everything below $75 is a loss of initial return.
Deconstruction:
To replicate the upside investors would first need a long 1 unit of basket digital call set at $100. Second a long 1 unit of basket vanilla call with a strike price of $114.90. For the down side investors would need to short 1 basket down-in put with a stock price of $100 and a strike price of $75. The basket would have 80% of the weight is based on MSCI EAFE Index and the rest in MSCI Emerging Market Index.
Risk ( Market and Credit):
It is critical to understand market risk is based on the correlated value of MSCI EAFE Index and the MSCI Emerging Market Index, with respect to their weights. The credit risk arises from BoA’s creditworthiness and the market risk arises from the equity basket performance. The step- up feature and upside call is to reward investors for take a 1-to-1 downside exposure is the value of the basket is beyond a 25% decline as well as forgoing interest payments. This indicates that the investors of this note are bullish individuals who believe only a small amount of downside protections is needed. This could be due to the weights associated with the two indexes in the basket and the correlation between the two is closer to 1 at .89 percent. Meaning they move in a similar manner so the returns would look the numbers displayed below.
|
Ending
Value
|
Redemption
Amount per Unit
|
Total
Rate of Return on the Notes
|
|
$0.00
|
$2.50
|
-75.00%
|
|
$50.00
|
$7.50
|
-25.00%
|
|
$65.00
|
$9.00
|
-10.00%
|
|
$75.00
|
$10.00
|
0%
|
|
$80.00
|
$10.00
|
0%
|
|
$90.00
|
$10.00
|
0%
|
|
$94.00
|
$10.00
|
0%
|
|
$97.00
|
$10.00
|
0%
|
|
$100.00
|
$11.49
|
14.90%
|
|
$102.00
|
$11.49
|
14.90%
|
|
$105.00
|
$11.49
|
14.90%
|
|
$110.00
|
$11.49
|
14.90%
|
|
$114.90
|
$11.49
|
14.90%
|
|
$120.00
|
$12.00
|
20.00%
|
|
$130.00
|
$13.00
|
30.00%
|
|
$140.00
|
$14.00
|
40.00%
|
|
$150.00
|
$15.00
|
50.00%
|
|
$160.00
|
$16.00
|
60.00%
|
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