If you invest in a company in a traditional manner by purchasing a stock, then you are mainly hoping for rising share prices. If you’re on target, you participate fully in rising prices, but the same also holds true when the share prices fall. Welcome Bonus Certificates focus on the latter as an investment product that offers attractive returns when the prices on a stock market remain flat or decline. Instead of investing directly in a stock, you invest in a Bonus Certificate in this stock, which functions as the so called “underlying asset” for the certificate. The underlying asset can be an equity or an equity index such as the ATX or the EURO STOXX 50.
Let’s look at an example! Suppose you invest 100 Euro in a Bonus Certificate on a selected share which is currently trading at the price of 100 Euro. Along with the underlying asset, the term of the Bonus Certificate is also defined – in this case 3 years – as well as a lower price limit – the “barrier” – at 70 Euro and an upper prize limit – the “bonus level” – at 130 Euro. How the certificate works is easy, as long as the share price never reaches or falls below the barrier during the term of 3 years, you receive the bonus level of 130 Euro. For most Bonus Certificates issued by Raiffeisen Centrobank, the bonus level represents the maximum return – also known as the “cap”.
This means that you do not participate in any increases in the share price above 130 Euro. But what happens if the share price falls below the barrier? If during the term the share price reaches the barrier, then the bonus mechanism ceases to function and you are fully exposed to the market risk, i.e.
at the end of the term repayment of the certificate corresponds to the price development of the share. Consequently significant losses are possible in the event of steep declines in prices. Supposed after 1 year, this share price breaks through the barrier level and declines to 50 Euro at the end of the term.
In this case you would only receive one half of your invested capital – 50 Euro. Certificate holders are not entitled to dividends paid out by a share. As you can see Bonus Certificate offer advantages in the zone between the barrier level and the bonus level. In this broad area the certificate is superior to a direct investment. As for all investment certificates, the issuer risk needs to be taken into consideration.
At Raiffeisen Centrobank, we offer a wide range of Bonus Certificates. For more details please visit our website or check our new investment Certificate Finder that guides you through various investment opportunities with investment certificates using simple questions. If you would like to receive more information about our certificates, please contact your banking advisor!