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What is an ELN (Equity-Linked Note)?

An Equity-Linked Note (ELN) is a debt instrument that differs from a standard fixed-income security in that the coupon is based on the return of a single stock, basket of stocks or equity index (the “underlying equity”). An ELN is a principal-protected instrument generally designed to return 100% of the original investment at maturity, but diverges from a standard fixed-coupon bond in that its coupon is determined by the appreciation of the underlying equity.

There are many groups of investors who incorporate ELN’s into their investment strategies, including:
1. Conservative, risk averse equity investors or intermediate-term fixed-income investors.
2. Tax-exempt/tax-deferred accounts and off-shore accounts.
3. Investors for whom structural problems prohibit or limit equity allocations (e.g., certain trusts, retirement accounts/pension funds or insurance companies).

The Equity-Linked Note can be constructed by packaging a call option and a zero coupon bond. The call option provides the note buyer with exposure to the underlying equity. The zero coupon bond provides the note buyer with principal protection. A zero coupon bond allows for principal protection since it accretes from its discount value to its par value over a specified period of time without periodic payments of interest. The discount from the par value of the zero coupon bond can be used to purchase the call option on the underlying equity.

What are Bull Equity-Linked Notes?