What is a bull note?

A bull note is a type of investment. It is called a “structured note”. The goal of a bull note is to make money for the investor. This happens if something goes up in value over time.

Bull notes are based on an asset or market. An asset is something that has value. For example, company stocks are assets. Commodities like gold or oil are also assets. Bull notes can be made for any kind of asset.

How bull notes work

Here is how a basic bull note works:

An investor buys the bull note from a bank or financial company.
The bull note is tied to an underlying asset, like a stock.
If the asset goes up in value, the bull note pays the investor more money. This is called the coupon.
At the end of the bull note’s term, the investor also gets back their original investment. This is the principal.

The specifics of each bull note are different. The bank decides the terms when they create the bull note. Terms include:

How much the asset needs to go up for the investor to make money
How much extra money the investor makes if the asset goes up
How long the bull note lasts before the investor gets their principal back

Some bull notes have a “barrier”. This is a price level the asset must stay above. If the asset falls below the barrier, the terms of payout change. The investor may lose some or all of their money.

Coupons

Many bull notes pay coupons. A coupon is a payment the investor gets. It is like interest. The amount of the coupon depends on how well the asset performs.

For example:

Asset stays above the initial price: Investor gets a 10% coupon
Asset goes up 5% from initial price: Investor gets a 15% coupon
Asset goes up 10% or more from initial price: Investor gets a 20% coupon

The numbers are different for each bull note. If the asset goes down, the investor may get no coupon at all.

Participation rate

Some bull notes have a participation rate. This affects how much of the asset’s gain the investor gets.

For instance, say a bull note has a 150% participation rate. If the asset goes up 10%, the investor gets a 15% return (10% x 150% = 15%).

Pros and cons of bull notes

Potential for higher returns

The main appeal of bull notes is they can pay more than other fixed investments. Regular bonds and CDs have lower interest rates. Bull notes offer the chance to earn more.

However, higher potential returns come with higher risk. The investor only does well if the asset goes up. If it does not, they may earn less or even lose money.

Principal protection

Another advantage of some bull notes is principal protection. This means the investor cannot lose their initial investment. Even if the asset goes down, they get back what they put in.

But not all bull notes have full principal protection. Some only protect a portion of the principal. Others do not protect the principal at all. It is important to check before investing.

Lack of liquidity

A drawback of bull notes is they are not liquid. The investor’s money is tied up for a set term. It is not easy to get the money out early if needed.

With stocks and bonds, the investor can usually sell any time. Bull notes do not work that way. Some may allow early withdrawal, but the investor will pay a penalty.

Credit risk

Bull notes also carry credit risk. This means the investor can lose money if the bank goes bust. The bank must stay in business and be able to pay what they owe.

Regular stocks and bonds can also have credit risk. But it is a bigger factor with bull notes. The investor relies on a single bank to pay them back.

Considerations for investors

Bull notes can be a good fit for some investors. But they are complex and have unique risks. Here are some things to keep in mind:

Understand your risk tolerance

All investments have some risk. Bull notes often have more risk than savings accounts or CDs. But they may have less risk than investing directly in stocks or commodities.

Think about how much risk is right for you. Bull notes with higher coupon rates usually have more risk. Notes with full principal protection tend to have less risk.

Read the fine print

Every bull note is unique. The details are in the term sheet or prospectus. Read this carefully before you invest.

Key things to look for:

How the coupon is calculated
If the principal is protected
How long the money is tied up
Penalties for early withdrawal
The credit rating of the bank

Do not invest unless you fully understand the terms. Ask questions if anything is unclear.

Diversify your investments

Putting all your money in one place is risky. Spread it out across multiple investments. This is called diversification.

Bull notes can be a way to diversify. But they should only be one part of a wider mix of investments. This might include stocks, bonds, real estate, and cash.

Consider your timeline

Think about when you will need the money. Most bull notes make you commit the funds for a set number of years. They are not a good choice if you need the cash sooner.

Have an emergency fund in place. Do not invest money in bull notes that you may need for urgent expenses. You could have to pay a stiff penalty to access it early.