Principal-protected note (PPN) - Financial definition
Concise definition of the term principal-protected note
A principal-protected note (PPN) is a type of structured financial product that guarantees the return of the initial investment (principal) at maturity, regardless of market conditions. It combines fixed-income securities with derivatives to provide this protection while offering potential upside linked to the performance of an underlying asset.
Comprehensive definition of the term principal-protected note
Principal-protected notes are designed to appeal to risk-averse investors seeking both safety and growth potential. They typically involve a bond component that ensures the return of the principal and an options component tied to the performance of an underlying asset, such as equities, commodities, or indices. The bond portion grows to the principal amount over time, while the options provide exposure to potential gains.
For example, a PPN might offer participation in the stock market's upside without risking the initial investment. Market practices include the issuance of these notes by financial institutions, often with varying terms and underlying assets to suit different investor preferences. These products are particularly popular in uncertain economic environments, providing a balance between capital preservation and investment growth opportunities.