November 24, 2009
Nigel Johnson, Andrew Pace
In the past several months we have written articles on the dangers of structured notes and callable step-ups. Both of these products were created by the Street to meet a need felt by investors. In the case of the step-ups, there is a need to put dollars to work in a product that will do well (“step up”) when rates rise. The structured note feeds a much more basic need, a need for yield (as high as possible). In the previous articles, we learned to put emotion and intuition aside, and by crunching the numbers and running the shapes, we illustrated that what appears to be attractive investment alternatives are actually poor risk/rewards.