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Tutorial: Bonus-certificates

What are bonus certificates?

Bonus certificates combine three advantages in one product. The investor benefits from rising prices of the underlying instrument, receives a sizeable bonus payment, and, in the case of falling prices, is protected up to (or in fact, down to) the safety barrier. In case of an unexpected slump, the bonus payment is dropped, and the price of the underlying instrument is credited at the end of maturity.

How do bonus certificates work?

The bonus level is set above the current price of the underlying at the issue of the certificate. The barrier is set below the initial value. If the specific certificate comes with a cap as well, it is set at or above the bonus level.

The redemption at the end of maturity hinges on the development of the underlying. The following two cases can occur:
If the underlying asset never falls to or below the barrier level during the term of the certificate, the investor receives at least a payment equaling the bonus level. If the price of the underlying is higher than the bonus level at the end of period date, s/he receives the higher payment out of the two. If a maximum payout (a cap value) of the certificate has been set, the payout amount is limited by this cap value.

If the underlying does fall to or below the barrier at least once during the term of the certificate, there will be no bonus payment. The investor gets the performance of the underlying paid out at the end of maturity (limited by the cap, if any). Depending on whether the price of the underlying is below or above the issue price, the investor suffers a loss or makes a profit.

Your benefits

With bonus certificates you have the chance to earn an attractive return even if the price of the underlying has not moved or has in fact fallen, as long as the price of the underlying has not fallen to or below the barrier. This means that bonus certificates also bring a little more safety to your portfolio.

Your advantages

  • Your receive an attractive bonus payment at the end of maturity even in the case of stable or falling prices as long as the price of the underlying has not fallen to or below the barrier.
  • The barrier offers partial protection to falling prices.

Details you should be aware of

  • The return may be limited by the cap value.
  • If the price of the underlying asset falls to or below the barrier level at least once during the term of the certificate, a loss is possible.
  • Between issue date and maturity, price fluctuations are possible, which means that the sale of the bonus certificates prior to maturity may result in a loss.
  • If this is not a quanto certificate or the certificate is not secured against a currency risk, the performance of the certificate is affected by the positive or negative trend of the exchange rate between the certificate’s currency (CZK) and the currency in which the underlying asset is traded. If CZK strengthens, the price of the certificate falls and if CZK weakens the price of the certificate rises.
  • In case that this is not a quanto certificate or the certificate is not secured against currency risk, the performance of the certificate is affected positively or negatively by the trend of the currency exchange rate between the currency of the certificate (CZK) and the currency in which the underlying asset is traded. If CZK strengthens the price of the certificate falls and if CZK weakens the price of the certificate rises.
  • In case that this is a quanto certificate, the certificate is secured against currency risk. The performance of the certificate is not affected by the trend of the currency exchange rate between the currency of the certificate (CZK) and the currency in which the underlying asset is traded.

How do bonus certificates react to…

… rising markets?
In rising markets, the investor receives the bonus payment at the end of maturity. If the certificate is not capped, you participate directly from the development of the underlying once the price of the underlying is above the bonus level.

… stable markets?
In stable markets, the investor receives the bonus payment (sideways yield) at the end of maturity.

… falling markets?
In the falling markets the investor receives the bonus payment at the end of the maturity period as long as the price of the underlying asset has never once fallen to or below the barrier level. If the price of the underlying asset has fallen to or below the barrier level, there is no bonus payment and the certificate follows the performance of the underlying asset until the end of the maturity period (i.e. losses are possible).


Payoff-Chart




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