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Range Accrual Notes At A Glance
Capabilities and Services
Overview
A Range Accrual Note (RAN) is a
structured product typically issued by a financial institution such as a
bank. The payoffs from such a note are more complex than those for a
plain-vanilla fixed income product, all else equal. A RAN accrues
interest at an above-market coupon rate (as compared with the
conventional debt of the same issuer, maturity, and seniority) for each
day on which a reference index is fixed within a predetermined range.
However, interest accrues at a reduced or zero rate for each day on
which the reference index falls outside of the predetermined range. In
fact, some RANs have a digital or “all-or-nothing” structure in which
the coupon for each interest accrual period is either paid in full or is
not paid at all, depending upon whether the reference index falls
within the predetermined range on a specific observation date (digital
discrete) or throughout the entire coupon period (digital continuous).
The reference indices for range accrual products can vary. An interbank interest rate RAN references an interbank interest rate such as LIBOR or Euribor. Other types of RANs reference swap rates, spreads between interest rates or swap rates, individual stocks or baskets of stocks, or a stock index (e.g., the S&P 500 index). In fact, RANs can reference more than one index. For example, a dual RAN accrues interest at the coupon rate for each day where two reference indices (e.g., LIBOR and the S&P 500) both fall within their respective predetermined ranges. If either reference index falls outside of its predetermined range, interest accrues at a reduced or zero rate.
While the coupon rate is often fixed, some RANs have provisions in which the coupon rate changes over time or is itself tied to a variable reference index. The range of the reference index can also change throughout the life of the product. As with a conventional debt instrument, the principal of the RAN is typically paid at maturity. However, many RANs are structured to be callable by the issuer at par prior to maturity.
A Closer Look
An investor in a daily RAN is effectively selling... (download PDF to read in its entirety).