Tuesday, October 02, 2007

Single premium endowment invested in CDOs

Dear Mr Tan,

I like to get your advice on this investment product: a single premium investment linked plan with annual payout of up to 4% over a 5 year term and return of 100% of the principal invested at maturity. Also get additional life insurance coverage of up to 110% of the amount of investment.

It invests into a Collateralised Debt Obligation (CDO) tranche of corporate credits with credit rating of AA by S&P's. Min. single premium of $5K.


Are you sure that the return on maturity is guaranteed? Who provides the guarantee?

Usually, when the issuer states that the money is invested in a certain class of assets, there is a statement that, in the event of default of the assets, the investor has to suffer a loss. You should check this point carefully.

Collateralised debt obligation are a risky class of asset now, even if they are rated as AA. Some of these assets have depreciated in value.

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