Some equity-linked structured notes combine an autocallable feature with a knock-in condition. If the stock price falls sharply and the note knocks in, it may be redeemed for less than the principal.
Consider a hypothetical example in which a note is linked to a stock with an initial price of 1,000 yen and is redeemed early if the stock price on an observation date is 1,000 yen or more. If the price is 1,300 yen on the observation date after one year, the investor receives the face value and that year's coupon, and the note ends. Even though the stock price has risen 30%, the investor receives only the coupon and does not gain from the rise. Suppose the same note also knocks in if the stock price falls to 600 yen or below. If the price never reaches 1,000 yen on an observation date, falls to 550 yen during the term and knocks in, and is 700 yen at maturity, the note is redeemed at 70% of face value.
Unlike a callable feature, which lets the issuer choose whether to redeem, the redemption depends only on the price of the underlying asset.