Principal Guaranteed, Principal Protected

Hi Mr. Tan,
Let me explain what I know about the difference since I have held some of these products before:

Principal Guaranteed – The issuer (not necessary the bank selling you the notes) guarantees it. As long as the issuer does not go bankrupt you should be safe. However the issuer of such notes are usually special vehicle companies set up by reputable banks such as Merril Lynch. So the vehicle goes bankrupt the bank itself is not affected. Not sure if that is their intention but I read it as so. But generally I think it is quite safe.

Principal Protected – Usually the issuer takes your money and go purchase a zero coupon bond and so get a discount upfront. It is protected as long as the bond issuer do not default. As I understand it the bonds invested are usually rated A+ and above (does not really mean much as Lehman Brother bonds are also rated A+). The money they get from the original discount is then used to “invest” in a risky way , i.e. options, currency and whatever. Once they have lost all your money thru these risky stuff and taken their fees, then they tell you now you are sitting on a zero coupon bond and waiting the next 5 years with zero payment.

Basically my point is that these products are TOTALLY NOT TRANSPARENT and USUALLY DO NOT EVEN give return of FD over the 5 years. If the investor wants to get that 1-2% more than FD, I suggest they go buy bond themselves and invest the rest. Sorry just my 2 cents....I do get quite passionate about this as I have seen many people suckered into such deals.

C

REPLY
Thank you for the explanation. I agree with your explanation.