As a fictional example, an exchangeable bond (EB) with a face value of 1 million yen and a term of one year pays a 6% coupon in cash at maturity. If the share price falls to the knock-in price of 2,800 yen or below at any time, the bond knocks in. If it has knocked in and the share price at maturity is below the initial price of 4,000 yen, it is redeemed in shares (face value ÷ initial price); otherwise it is redeemed in cash at face value. If the share price fell once to 2,600 yen and was 3,000 yen at maturity, what is the investor's profit or loss, including the coupon and excluding dividends and taxes?
Quiz: Structured Notes
Last reviewed: September 25, 2026
This is a draft, shown for review before publication.
7 questions to check your understanding of the chapter “Structured Notes”. 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 investor loses 190,000 yen. The bond knocked in during the term, and the share price at maturity of 3,000 yen is below the initial price of 4,000 yen, so the bond is redeemed in shares. The number of shares is 1 million yen ÷ 4,000 yen = 250 shares, fixed regardless of the share price at maturity. The 250 shares are worth 250 × 3,000 yen = 750,000 yen. Adding the 60,000-yen coupon brings the total received to 810,000 yen. The profit or loss is 810,000 yen − 1 million yen = −190,000 yen.
A profit of 60,000 yen assumes that the bond is redeemed at face value because the share price at maturity is above the knock-in price. Some types work that way, but under the terms in this question, the share price at maturity is compared with the initial price. A loss of 250,000 yen leaves out the 60,000-yen coupon (750,000 yen − 1 million yen). A loss of 290,000 yen values the shares at 2,600 yen, the lowest price during the term (250 shares × 2,600 yen + 60,000 yen − 1 million yen). The market value of the shares delivered depends on the share price at maturity.
If the bond does not knock in, it is redeemed at the face value of 1 million yen whatever the share price at maturity, and the investor makes a profit equal to the 60,000-yen coupon. Even if the share price rises above the initial price, the investor's gain is limited to the coupon. The investor in an exchangeable bond is in the same position as having sold a knock-in put, a put option on the underlying shares that takes effect only after a knock-in.
Learn more: Exchangeable Bonds (EB)
Question 2
As a fictional example, a so-called principal-protected equity index-linked note on the Nikkei Stock Average has a face value of 1 million yen, a term of five years, and no coupon. The value of the Nikkei Stock Average when the terms were set (the initial price) was 10,000 yen. The redemption amount at maturity is the face value of 1 million yen plus 1 million yen × 50% × the rise in the index (nothing is added if the index falls). If you view this note as a combination of two transactions, which statement is correct?
Answer and explanation
Answer: B
The note combines a zero-coupon bond that repays the face value at maturity and a long call option on the index. The amount added to the face value is zero if the index is at or below the initial price, and it grows with the rise once the index is above the initial price. This shape is the same as a long call on the index with its strike price at the initial price. For example, if the five-year zero-coupon bond were priced at 900,000 yen, the remaining 100,000 yen of the 1 million yen the investor pays would go toward the price of the call and costs.
With a short put, the amount received falls when the index falls. That is how the redemption amount falls on a note with a knock-in feature, when the note has knocked in and the index at maturity is below the initial price. With a long put, the amount received rises when the index falls, which is the opposite of the shape of the added amount. With a short call, the amount received falls when the index rises, which is also the opposite.
If the index is 14,000 yen at maturity, half of the 40% rise, or 20%, is added, and the redemption amount is 1.2 million yen. If it is 8,000 yen, the redemption amount is the face value of 1 million yen, but because the investor has received no coupon for five years, the amount received is less than on an ordinary bond of the same term. Redemption at face value depends on the issuer being able to pay and applies only if the note is held to maturity.
Learn more: Equity Index-Linked Notes
Question 3
As a fictional example, a callable bond has a face value of 1 million yen, a term of five years and a coupon rate of 2% a year (paid once a year). The issuer can redeem it early at face value on the coupon dates after 2, 3 and 4 years. On the coupon date after 2 years, the yield on a 3-year bond with the same credit as the issuer had fallen to 1% a year. What is likely to happen?
Answer and explanation
Answer: A
The issuer becomes more likely to choose early redemption. Because market rates are below the bond's coupon rate, the issuer can redeem the bond and refinance at a lower rate. The investor has no say in whether the bond is redeemed and has to reinvest the returned money at a lower rate (reinvestment risk). If the returned 1 million yen is reinvested in a 3-year bond paying 1% a year, the interest over five years is 40,000 yen for the first 2 years plus 30,000 yen for the next 3 years, 70,000 yen in total. That is 30,000 yen less than the 100,000 yen the investor would have received had the bond not been redeemed.
Selling the bond back and reinvesting at a higher rate describes a put bond, on which the investor holds a put, when market rates rise above the bond's coupon rate. When rates rise, the issuer is likely not to redeem the bond, and the 2% interest continues. Automatic redemption when a condition is met on an observation date applies to bonds with an automatic early redemption (autocall) feature. On a callable bond, the issuer chooses whether to redeem.
If the yield after 2 years had risen to 3% a year, the issuer would be unlikely to redeem the bond, and the investor would receive 100,000 yen of interest over five years. However, the investor would then keep holding a 2% bond while the market yield is 3% a year, and selling it before maturity would bring a price below face value.
Learn more: Callable Bonds and Early Redemption Features
Question 4
As a fictional example, an investor holds 1 million yen face value of a convertible bond (CB; formally called a convertible bond with share options in Japan) with a conversion price of 1,000 yen. At maturity, the issuer's share price has fallen to 500 yen. Assuming the issuer is still able to pay, what does the investor receive at maturity?
Answer and explanation
Answer: C
The investor receives the face value of 1 million yen at redemption. A CB investor holds a call to buy the issuer's shares at the conversion price and chooses whether to convert into shares. Converting would give 1 million yen ÷ 1,000 yen = 1,000 shares. Their market value is 1,000 shares × 500 yen = 500,000 yen. Because this is below the face value of 1 million yen, the investor does not convert and receives the face value. At maturity, a CB is worth the higher of the value of the shares received on conversion and the face value.
Expecting to receive 1,000 shares confuses a CB with an exchangeable bond (EB). On an exchangeable bond, if the price of the underlying shares falls below a set price, shares are delivered instead of the face value. On a CB, the investor chooses whether to convert even when the share price has fallen. The figure of 2,000 shares calculates the number of shares from the share price at maturity. The number of shares is the face value divided by the conversion price. The figure of 500,000 yen is the value on conversion, and a CB is never worth less than its face value at maturity.
If the share price at maturity were 1,600 yen, the investor would convert, and the 1,000 shares would be worth 1.6 million yen. On the other hand, if the investor had bought this CB in the market for 1.1 million yen, reaching maturity with the share price still at 1,000 yen or below would mean losing the 100,000 yen paid above face value. If the issuer goes bankrupt, the investor may receive neither the interest nor the face value.
Learn more: Convertible Bonds (CB)
Question 5
As a fictional example, a special purpose company (SPC) issues a credit-linked note (CLN) with a face value of 1 billion yen and a term of five years, and uses the 1 billion yen paid in to buy government bonds with a coupon of 0.5% a year as collateral. It sells protection on a reference entity through a credit default swap (CDS) for a premium of 1.5% a year, and pays the investor interest of 2% once a year. After the interest payment at 3 years, a credit event occurs (immediate redemption, no further interest) and the price of the reference entity's debt is 30% of face value; with no costs and the government bonds sold at face value, what is the investor's profit or loss, including interest?
Answer and explanation
Answer: B
The investor loses 640 million yen. The SPC sells the collateral government bonds and pays the CDS counterparty (the protection buyer) 1 billion yen × (100% − 30%) = 700 million yen. The remaining 1 billion yen − 700 million yen = 300 million yen goes to the investor as the redemption amount. Each year's interest is 1 billion yen × 2% = 20 million yen. For the 3 years before the event, the investor receives 60 million yen. The total received is 360 million yen, and the profit or loss is 360 million yen − 1 billion yen = −640 million yen.
A loss of 700 million yen leaves out the 60 million yen of interest received (300 million yen − 1 billion yen). A loss of 600 million yen assumes that the investor keeps receiving interest after the event until maturity, 100 million yen over the five years (300 million yen + 100 million yen − 1 billion yen). This CLN is redeemed immediately after the event, so no further interest is paid. A loss of 240 million yen mistakes the 700 million yen paid to the protection buyer for the investor's redemption amount (700 million yen + 60 million yen − 1 billion yen).
If no event occurs for five years, the investor receives 20 million yen of interest every year and is repaid at face value at maturity. The profit is 100 million yen, 75 million yen more than the 25 million yen from holding only government bonds with the same 1 billion yen. This difference is the premium paid for taking on the reference entity's credit risk.
Learn more: Credit-Linked Notes (CLN)
Question 6
As a fictional example, a bond is a reverse dual currency bond, whose principal is redeemed in yen and whose coupon is denominated in a foreign currency, with coupon swaps embedded in it. The face value is 100 yen, and the coupon rate is "15% in dollars × the exchange rate on the payment date ÷ 123 yen − 9.6% in yen". If the result is below 0%, the coupon rate is 0% (a zero floor). If the exchange rate on the payment date is 100 yen to the dollar, which is closest to the coupon rate for that payment?
Answer and explanation
Answer: D
The coupon rate is about 2.6%. Putting 100 yen into the formula gives 15% × 100 ÷ 123 ≈ 12.2%, and subtracting 9.6% leaves about 2.6%. The zero floor applies when the formula's value is 0 or below, which is at 78.7 yen (123 × 9.6 ÷ 15) or lower. At 100 yen the yen is weaker than that, so the formula's value is the coupon rate.
0% assumes that the zero floor applies, but 100 yen is above 78.7 yen. 5.4% is the value at an exchange rate of 123 yen (15% − 9.6%). At 100 yen, 15% is multiplied by 100 ÷ 123. 12.2% leaves out the subtraction of the 9.6% in yen.
The coupon rate rises when the yen weakens and falls when it strengthens. At 160 yen on the payment date it is about 9.9%, but at 70 yen it is 0%. On a bond with a long term, a prolonged period of a strong yen means a longer period of low coupons.
Learn more: PRDC Notes
Question 7
As a fictional example, a bond has a face value of 1 million yen and a term of three years. The observation dates are 1, 2 and 3 years after issue. If the Nikkei Stock Average on an observation date is at or above the reference price of 10,000 yen, the bond pays a coupon of 4% of face value (40,000 yen) for that date. If it is below 10,000 yen, the coupon is 0 yen. At maturity, the face value of 1 million yen is redeemed. On the observation dates, the Nikkei Stock Average was 10,000 yen after 1 year, 9,999 yen after 2 years and 12,000 yen after 3 years. If the issuer is able to pay, what is the total amount received, including the face value at maturity?
Answer and explanation
Answer: C
The total received is 1.08 million yen. After 1 year the index is 10,000 yen, at the reference price, so the coupon is 40,000 yen. After 2 years it is 9,999 yen, below the reference price, so the coupon is 0 yen. After 3 years it is 12,000 yen, so the coupon is 40,000 yen. The coupons total 80,000 yen, and adding the face value of 1 million yen gives 1.08 million yen. The coupon on each observation date is either 40,000 yen or 0 yen, and the amount by which the index exceeds the reference price does not change it. At 12,000 yen after 3 years, the coupon is the same 40,000 yen as at 10,000 yen.
1.12 million yen assumes that all three coupons are received. After 2 years the index is 1 yen short, so the coupon is 0 yen. 1.04 million yen leaves out the 1-year date, where the index is exactly 10,000 yen. In this example the condition is "at or above the reference price," so the coupon is 40,000 yen after 1 year as well. 1.06 million yen is the total from an ordinary bond of the same term paying 2% a year (20,000 yen a year), not from this bond.
In this example, the bond beats the ordinary bond if the condition is met on two or more dates. If the index is below 10,000 yen on all three dates, there are no coupons, the amount received is the face value of 1 million yen, and it is 60,000 yen less than on the ordinary bond.
Learn more: Digital Coupon Notes