Structured Notes
Commodity-linked notes are popular with investors wishing to gain exposure to
commodities without having to bear all of the price risk inherent in commodities.
Commodity-linked notes combine the security of a fixed-income instrument with an
exposure to commodities, generally in the form of an option or futures contract tied
to a commodity index. The notes are non-interest-bearing instruments, and their
maturities typically vary from one to five years. On the maturity date, the note pays
the initial principal amount plus a return based on the price change of the
underlying commodity instrument. Structured notes avoid some of
the tax complications that plague commodity futures and thus offer an attractive
feature for institutional investors (particularly, mutual funds). Structured notes are
debt instruments and are frequently unsecured, however, so the
creditworthiness of the issuer is of utmost importance. As with ETNs, concern
about the counterparty or credit risk of the issuers can limit the liquidity of the
market for these instruments.
