Splitting a structured product into an ordinary bond or other product and the embedded derivative shows the shape of its gains and losses. When the products below are split this way, which one makes the investor the buyer of an option?
Quiz: Structured Product Concepts
Last reviewed: September 25, 2026
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4 questions to check your understanding of the chapter “Structured Product Concepts”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: D
The answer is the convertible bond (formally called a convertible bond with share options in Japan). A convertible bond splits into a bond and a call option on the shares, and the investor is the buyer of the call. In this form, the investor is the one paying the premium. The interest rate on a convertible bond is generally lower than on a straight bond.
An exchangeable bond splits into a bond and a put option on the underlying shares (shares of a company other than the issuer), and the investor is the seller of the put. With a callable bond, the investor has sold the issuer the right to redeem the bond early. With a credit-linked note, the investor has sold protection on the credit risk of a reference entity (a credit default swap).
When the investor sells an option, if market values move against the investor, the investor bears the loss.
Learn more: What Are Structured Products?
Question 2
For many structured products, what is the source of the higher coupon the investor receives?
Answer and explanation
Answer: A
In many structured products, the investor sells an option through the product, and the issuer receives the premium as payment for it. However, the whole premium does not reach the investor. The structuring fee, which becomes revenue for the financial institution that structures the product (the dealer), is taken from the premium, and the extra coupon is paid out of what is left. With credit-linked notes too, the extra coupon the issuer pays the investor is smaller than the premium the issuer receives. Some products raise the coupon through a feature that multiplies the movement of an index or rate into the coupon (leverage).
The fee the distributor charges when it sells the product to the customer (the sales fee) is not the source of the coupon. It is a separate fee, charged in addition to the structuring fee. In return for the higher coupon, if market values move against the investor, the investor bears the loss.
Learn more: What Are Structured Products?
Question 3
As a fictional example, there is a so-called principal-protected structured note denominated in US dollars. Which statement about this note is correct?
Answer and explanation
Answer: B
The issuer's credit risk remains. Repayment also depends on the issuer's credit, so if the issuer's business or financial condition worsens, principal or interest may not be paid even if the note is held to maturity. A so-called principal-protected structured note is designed to return the full face value if held to maturity, however the index moves. As long as the issuer keeps paying, the full face value is returned in US dollars at maturity even if the index moves sharply against the investor.
What is returned at face value is an amount in the currency of the note (US dollars in this example). For a note in a foreign currency, currency risk can make the amount received in yen fall below the amount invested. When the note is sold before maturity, the sale price can fall below face value if the issuer's credit weakens and the price of the note falls. Many structured products are hard to sell before maturity, and even when they can be sold, the price may be well below the theoretical price (a price calculated with a model from market values).
Learn more: What Are Structured Products?
Question 4
On April 18, 2023, the Japan Securities Dealers Association amended its rules and guidelines on soliciting sales of complex structured notes and similar products, and the amendments took effect on July 1. What do the amended guidelines on reasonable-basis suitability require distributors to do?
Answer and explanation
Answer: C
The guidelines on reasonable-basis suitability require distributors to obtain the theoretical price (a price calculated with a model from market values) from the financial institution that structures the product and to verify whether the difference from the sale price is reasonable. They also require distributors to verify, product by product, whether there are customers to whom the product can be sold and, if so, which customers.
The guidelines on criteria for starting solicitation are the ones that require distributors to set criteria that exclude customers without a certain level of investment experience from solicitation. The guidelines on explaining important matters say that explanations should not overemphasize high interest rates or high credit ratings. It is the Japan Securities Dealers Association's guidelines on advertising, as amended in 2023, that ask that a note not be labeled "principal-protected" merely because redemption is 100% in the currency of the note.
Learn more: What Are Structured Products?