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Equity-Linked Note (ELN)

Equity-Linked Note (ELN).webp

Key Highlights

  • An Equity-Linked Note (ELN) is a structured investment product that offers returns linked to the performance of an underlying equity or equity index.

  • Types of ELNs includes principal-protected, non-principal-protected and reverse convertible ELNs.

What is Equity-Linked Note (ELN)

An Equity-Linked Note (ELN) is a structured investment product that offers returns linked to the performance of an underlying equity or equity index. It typically combines a fixed-income instrument with an equity derivative, providing enhanced yield potential in exchange for taking on market-linked risk.

How an ELN Works?

  • The investor’s return is determined by how the underlying stock or index performs over a specified period.

  • A portion of the investment acts like a bond and provides fixed interest.

  • The remaining portion is tied to the equity’s price movement through an embedded option.

  • This structure allows investors to earn higher yields compared to traditional deposits or bonds, subject to market risk.

Key Features of ELN

  • Enhanced Yield: Designed to offer higher coupon payouts compared to plain-vanilla fixed-income products.

  • Equity Linkage: Returns depend on the performance of a specific equity, basket, or market index.

  • Customisable Structures: Can be built with different strike prices, tenors, and payoff profiles to meet investor objectives.

  • Capital Risk: Principal may be partially or fully at risk depending on market performance and product design.

Types of ELNs

  • Principal-Protected ELNs: Offer partial or full capital protection with lower yield.

  • Non-Principal-Protected ELNs: Provide higher potential returns but expose principal to equity market downside.

  • Reverse Convertible ELNs: High-yield notes that may convert into shares of the underlying stock if prices fall below certain levels.

Benefits for Investors

  • Opportunity to earn higher returns than traditional debt instruments.

  • Exposure to equity markets with customised risk-return profiles.

  • Useful for tactical strategies in range-bound or moderately bullish markets.

Risks & Considerations

  • Principal is at risk in most structures if the equity underperforms.

  • Complexity requires understanding payoff terms, trigger levels and market scenarios.

  • Liquidity may be limited, especially in bespoke or OTC-structured notes.