Futures
Futures Glossary
Products- Other Investments
- Structured Products
- Range Accrual Notes
Structured Products
Range Accrual Notes
About Range Accrual Notes
A Range Accrual Note (RAN) is a structured fixed income product where the coupon is linked to the performance of a reference interest rate index, such as LIBOR¹. Enhanced interest is accrued each day that the reference index fixes within a predetermined range, while a lower coupon or zero interest is accrued any day that the reference index fixes outside of the range. The return from the note could be higher than that from traditional fixed-rate securities of comparable maturity and credit quality assuming the reference index stays within the predetermined range during the life of the note. If the reference index does not stay within the predetermined range, the return may be lower than the return on comparable traditional fixed rate securities. Coupons may be paid monthly, quarterly, or only at maturity, depending on the structure.
Some range accrual notes provide full principal protection if held to maturity or call. Some range accrual notes provide a minimum return of initial investment if held to maturity or call. If sold prior to maturity, market conditions or changes in the credit quality of the issuer may cause the resale price to be higher or lower than the purchase price. While a secondary market for range accrual notes is generally available, the secondary market is not guaranteed and range accrual notes should be considered as a buy-and-hold investment.
Callable Structures
Most range accrual notes are issued with a call provision, giving the issuer (but not the investor) the right to call the note, before the scheduled maturity date, typically at par. A call feature creates uncertainty for the investor as to whether the range accrual note will remain outstanding until its maturity date.
Because a call feature puts the investor at a disadvantage, callable range accrual notes often carry higher yields than noncallable range accrual notes. Most callable range accrual notes typically do offer some degree of call protection. An example would be a note that is not callable for the first two years. This means the investor is protected from a call for two years, after which time the issuer has a right to call the note.
Reasons To Consider Range Accrual Notes
- Potential to obtain above market returns by taking a view on future interest rate levels
- Depending on structure, possible principal protection or minimum return of initial investment upon maturity or call
- Further diversify existing fixed income portfolio
Risk Considerations
- Credit Risk: While some range accrual notes provide principal protection upon maturity or if called, any such guarantee rests on the credit quality of the issuer. Most issuers of range accrual notes are evaluated for credit quality by Standard & Poor's, Moody's Investor Service, or Fitch Ratings. Credit ratings reflect the independent opinions of the credit rating agencies and are not a guarantee of credit quality. In the case of default, an investor may lose all or part of the principal as well as any accrued interest.
- Coupon Income Risk: If the reference index does not fix within the predetermined range during the life of the note, the return could be lower than the return on traditional fixed rate securities of comparable maturity and credit quality, and could be zero.
- Liquidity Risk: While a secondary market for range accrual notes is generally available, Citigroup Global Markets Inc. does not guarantee such a market will exist. If a secondary market exists, investors may sell prior to maturity, however, range accrual notes should be considered as a buy-and-hold investment. If sold prior to maturity, market conditions or changes in the credit quality of the issuer may cause the resale price to be higher or lower than the purchase price.
- Call Risk: Callable range accrual notes may be called prior to maturity exposing investors to reinvestment risk. Investors risk losing a note paying a higher rate of interest when rates have declined and issuers decide to call their notes.
The notes described above may include contingent payment debt obligations of the issuer. U.S. holders of such notes would be required to include original issue discount ("OID") for U.S. federal income tax purposes in gross income on a constant yield basis over the term of such notes, whether or not they received any income.
Before you invest, there are many factors, including additional risks, to consider when selecting appropriate investments. To learn more about Range Accrual Notes, call a Smith Barney Financial Advisor.
¹ LIBOR (London Interbank Offered Rate): The rate of interest at which banks borrow funds, in marketable size, from other banks in the London Interbank Market. LIBOR, the most widely used benchmark or reference rate for short-term interest rates, is an international rate. The rate is an average derived from 16 quotations provided by banks determined by the British Bankers Association, the four highest and lowest are then eliminated and an average of the remaining eight is calculated to arrive at the fix.
This information does not constitute an offering document for any securities nor a solicitation of offers to purchase any security. An offering of securities may be made only by a final offering document, which will contain a complete description of the terms of the investment.
As with all investments, this product involves certain risks and may not be suitable for every investor. Investors are advised to view a prospectus for a description of each offering, including fees and risk factors.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which allows the issuer but not the investor to retain the right to redeem the debt, fully or partially, before the scheduled maturity date. Proceeds from sales prior to maturity may be more or less than originally invested due to changes in market conditions or changes in the credit quality of the issuer.
The above information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is no guarantee of future results. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Citigroup Inc., its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
INVESTMENT AND INSURANCE PRODUCTS: • NOT FDIC INSURED • NOT A BANK DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NO BANK GUARANTEE
• MAY LOSE VALUE
For more information, please contact your Smith Barney Financial Advisor.
