It can be viewed as a zero-coupon bond plus a purchased digital option for each determination date. The Japan Securities Dealers Association document uses the name "Nikkei Stock Average-linked note with a floating interest rate" for a bond whose interest rate is set high or low by the level of the Nikkei Stock Average, and does not use the term "digital coupon note"1. This glossary uses "digital coupon note" for any such bond whose coupon is set high or low by the level on the determination date, whatever the index. Because the level on each determination date is the condition, each coupon is either a fixed amount or zero (or a lower rate).

Consider a hypothetical example in which a bond with a face value of 1 million yen and a reference price of 10,000 yen pays a coupon of 40,000 yen if the Nikkei Stock Average on the determination date is at or above 10,000 yen. Whether the average is 10,001 yen or 12,000 yen, the amount received is 40,000 yen. At 9,999 yen it is 0 yen, so a difference of 1 yen changes the coupon by 40,000 yen.

It differs from a range accrual, which in most cases accrues interest from daily levels, in the unit on which the condition is checked. It also differs from an equity index-linked note with a knock-in feature, whose redemption amount depends on the level, in where the condition enters.

Notes

  1. Japan Securities Dealers Association, "日経平均リンク債の特徴やリスクとは？" (What are the features and risks of Nikkei Stock Average-linked notes?, in Japanese), page 1, "利率が変動する日経平均リンク債" (notes with a floating interest rate). It describes a bond whose high or low interest rate is set by whether the Nikkei Stock Average on the rate-setting date is at or above a reference price, and does not use the word "digital." ↩