Bonus certificates offer conditional capital protection. Investors seek safety in their investments but still want to participate in the upside potential of the underlying asset. Attractive returns are possible even in a scenario of sideways-trending or slightly falling prices.
How do bonus certificates work?
Bonus certificates offer many advantages over a direct investment. No other product provides such a large safety buffer while simultaneously offering the opportunity for full participation in rising prices.
A bonus certificate can be based on various underlying assets. At the end of the term, the product’s performance mirrors that of the underlying asset, but it is protected against price declines by the previously mentioned safety buffer. The bonus level is set above the price of the underlying asset at issuance, while the barrier is set below it. The barrier can even be defined as up to 50 percent below the price level at the time the certificate is issued.
If the underlying asset never falls to or below the barrier during the term, the investor receives at least the bonus amount at maturity. This amount consists of the initial value plus the bonus defined at issuance. This means that a positive return can be achieved even if the price of the underlying asset declines. If the price of the underlying asset is above the bonus level at maturity, the investor receives a payout equal to this price appreciation. A potential maximum amount (cap) may limit the potential return. On the other hand, a cap increases the bonus level (higher sideways return) or allows for a lower barrier (greater safety margin).
Losses can occur if the underlying asset breaches the barrier set at the beginning of the term. If this threshold is reached or fallen below, the bonus payment is forfeited, and the investor receives the equivalent value of the underlying asset as a payout. In this case, this value may be above or below the initial value.
Special case with cap
A bonus certificate may, however, also have a maximum amount – a cap – set. If, for example, there is a cap of 1,600 euros, the investor will be credited with the full amount up to that point, provided the barrier has not been breached. If the price rises to 1,800 euros, the investor receives 1,600 euros. On the one hand, the cap limits the investor’s potential return; on the other hand, it provides an increased safety buffer.
What to keep in mind
The bonus certificate is suitable for markets that are rising slightly, moving sideways, remaining stable, or falling slightly. It offers conditional capital protection, which is determined by the size of the safety buffer. A total loss is possible, but not likely.
