Product Solution
Indicative Terms – Best Issuer Quotation
|
Issuer |
Goldman Sachs International |
|
Product Type |
Principal Protection |
|
Structure |
Daily Range Accrual Note |
|
Tenor |
5 years, non-call 1 year period and thereafter quarterly callable at issuer’s discretion |
|
Settlement Cycle |
T+14 days |
|
Currency |
USD |
|
Underlying |
USD SOFR CMS 30y-2y Spread |
|
Coupon |
(USD 1-year SORA + Spread) x n/N p.a., where n means the total number of days where the Coupon condition is met where N means the total number of days in the period |
|
Spread |
2.6%* |
|
Coupon Condition |
CMS 30y-2y >= 0% |
|
Maturity Payoff |
100% + Coupon (if any) |
|
Reoffer |
98.5% |
*Indicative only, subject to the confirmed level on the trade date
Second best issuer: Nomura
Spread: 2.15%*
Interest Rate Chart
The only thing an investor shall consider is whether USD yield curve would invert. An inverted yield curve occurs when short-term interest rate exceeds long-term rate. Under normal circumstances, the yield curve is not inverted since debt with longer maturities typically carry higher interest rates than nearer-term ones.
Due to the high January US CPI number, US interest rate has increased faster in the short end than the long end to reflect potentially faster rate hike in the short term. However, we still hold the view that the CMS spread is unlikely to invert given robust albeit slower US economic growth outlook in 2022. Over last 20 years, the lowest point for the USD CMS 30y-2y spread was -0.0345%.
Hypothetical Illustration Grid to Enhance Yield using Leverage
Basic Assumptions
- Cost of borrowing at 3-month USD SOFR Rate plus 1% loan spread
- 3-month USD SOFR Rate = 0.506% as of 15 February 2022
- Cost of borrowing stays constant at 1.506% p.a. over life
- Custodian bank provides LTV to the product
- Coupon Condition is always met
- 1-year USD SOFR Rate = 1.263% as of 15 February 2022
- Coupon rate = 3.863% p.a.
- Leveraged Return = Coupon Rate + [LTV / (1 - LTV)] x (Coupon Rate – Cost of Borrowing)
|
Note LTV |
||||
|
50% |
66.7% |
75% |
90% |
|
|
Leveraged Return (p.a.) |
6.220% |
8.584% |
10.934% |
25.076% |
Key Risks
- The product is only principal protected if investors hold it until maturity date. The product’s mark-to-market is subject to underlying assets performance, interest rate risk and issuer’s credit risk etc.
- In the worst-case scenario, investors may experience a total loss of capital in the event of issuer’s default.
- If leverage is used, it may enhance investor’s return but also magnify loss if cost of borrowing is higher than coupon rate. Investors shall consider use of leverage with caution.