Equity-linked note
Equity-linked notes (ELN) are debt instruments that allow a borrower to raise funds by promising to repay a lender in a timeframe agreed by contract.
Key takeaways:
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Equity-linked notes (ELNs) are financial instruments that are linked to the performance of an underlying equity index or individual stock.
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ELNs typically have a fixed term and offer a coupon payment to the investor, which is typically higher than the yield of a comparable fixed-income investment.
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ELNs provide investors with exposure to the equity market, but with lower risk and higher income potential than investing directly in equities.
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The value of ELNs can be influenced by a range of factors, including the performance of the underlying equity index or stock, interest rates, and market volatility.
Where have you heard about equity-linked notes?
You’ve probably heard equity-linked notes mentioned with other debt instruments like bonds, debentures, certificates, mortgages and leases.
What you need to know about equity-linked notes
They’re different to standard fixed-income securities which provide regular repayments at a rate agreed in advance. These are designed to be kept to maturity with the final payout determined by the performance of the underlying equity, which is the return of a single stock, basket of stocks, or an equity index.
Equity-linked notes are a lower risk investment as they tend to be principal-protected which means an investor you’re guaranteed to receive 100% of the amount you invested at maturity. However, due to their conservative nature there is the risk that you might not receive any additional returns.
Find out more about equity-linked notes
Find out more about how underlying equity works and compare equity-linked notes to fixed-income securities.