← back to the menu
Prepackaged productsrisk 4 of 5: high, can drop a lot

Structured product

Rules, protection and tax below are for China.

What it is

A note issued by a bank that combines a bond with derivatives to produce a payoff shaped by a formula: capped upside, conditional protection, a coupon that depends on where an index sits on certain dates. Brazil's COE, Europe's structured notes and China's structured deposits are all versions of the same thing.

The appeal is the story: protection with upside, or a high coupon with a safety barrier. The reality is that the bank prices every piece in its own favour, the formulas are hard to value, and the moment you need to sell early there is usually only one buyer, the bank, at its price.

Because the note is the bank's debt, if the bank fails you queue with its other creditors, protection or not. Lehman Brothers' notes taught that lesson in 2008.

How it works

  1. You buy the note at issue for a fixed sum and a fixed term, typically two to six years.
  2. The payout depends on the path of an underlying index, share or basket, measured on dates set in the contract.
  3. Barriers, caps and participation rates shape what you get; the wording decides everything.
  4. At maturity the formula is applied and you receive the result, in the currency of the note.

The honest pros and cons

For

  • Some versions do cap losses, if the bank survives.
  • A defined outcome for people who cannot sit through open-ended volatility.
  • Occasionally the only regulated way to get a particular exposure.

Against

  • The formula is designed by the seller and is almost always worth less than it looks.
  • You carry the bank's credit risk on top of the market risk.
  • Very hard to sell before maturity at a fair price.
  • Fees are buried in the terms rather than shown as a number.

Getting it in China

Bank wealth management product (理财产品) available

    Wherever you are

    1. Ask what the note would cost to build from a plain bond and a plain index fund; the difference is what you are paying.
    2. Read the barrier and cap clauses until you can explain the worst case in one sentence.
    3. Check the issuing bank's credit rating; the promise is only as good as the bank.

    Try it

    Go deeper

    Also called

    structured notes, COE, structured deposits, capital-protected notes, autocallables

    Often confused with

    • Corporate bond: A loan to a company that pays interest; riskier than lending to a government because companies fail more often.
    • Term deposit: Money locked at a bank for a fixed period in exchange for a known interest rate.
    Structured product in China · wealth-coop