Bonus Certificates are suitable for investors who want a certain level of security and target high returns. A bonus will be paid as long as the underlying price does not fall below a Barrier level.
The Bonus level and the Barrier level are defined on the issue date. The Bonus level is set above the initial price and the Barrier level is set below.
The barrier can apply continuously, during the whole life of the structure (American style) or at maturity only (European style). If the Barrier level is not breached, investors will receive at maturity the greater of the Bonus level or underlying price. If the Barrier level is breached, the investors have an ordinary certificate that pays out the price of the underlying at maturity.
Advantages
- Bonus payments - above average returns if the underlying is stagnant or falls slightly
- Reduced risk - bonus is paid even when the underlying price falls to a certain level
- Unlimited profit opportunity. 100% participation if the underlying rises above the Bonus level
Price Behaviour
Bonus Certificates offer the following three possible payouts at maturity (description given for an American barrier):
- Underlying price has never breached the Barrier level and is above the Bonus level.
Investors receive a cash payment equal to the final level of the underlying.
- Underlying price has never breached the Barrier level but is below the Bonus level.
Investors receive an amount equal to the Bonus level.
- Underlying price has at least once breached the Barrier level.
Investors receive the final level of the underlying and the bonus mechanism will no longer be active.
Assumptions
XYZ share price is EUR 10.
Barrier level is EUR 8 and monitored continuously (American style).
Bonus level is EUR 13.
Strike price is EUR 10.
Scenario 1
During the life of the XYZ share, the price of the underlying has not breached the Barrier level and at maturity the share trades at EUR 16.
The investor will receive EUR 16.
Scenario 2
Barrier level is not breached and XYZ share trades below Bonus level, let's assume at EUR 9.
The investor will receive EUR 13, which is the Bonus level.
Scenario 3
Barrier level has been breached, the investor will receive the value of the XYZ share at maturity, e.g. EUR 9 in scenario 2, or EUR 16 in scenario 1.
Structure Components
- Long Underlying (excluding dividends)
- Long Knock-Out Put Option (Strike at 100% + Bonus level, Knock Out at Barrier level)
Risks
The Bonus Certificate converts into a normal certificate when the Barrier level is breached. In that case, the risk related to investing in the Bonus Certificate is comparable to a direct investment in the underlying. If the underlying decreases, the value of the Certificate decreases. In the worst case, the investor can lose their entire investment.