What is an equity-linked note (ELN)?

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:

Equity-linked notes (ELNs) are financial instruments that are linked to the performance of an underlying equity index or individual stock.
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.
ELNs provide investors with exposure to the equity market, but with lower risk and higher income potential than investing directly in equities.
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.