Range accrual note - Financial definition
Concise definition of the term range accrual note
A range accrual note is a type of structured financial product where interest payments are determined based on the performance of an underlying reference rate staying within a specified range.
Comprehensive definition of the term range accrual note
Range accrual notes are typically used by investors seeking higher yields compared to traditional fixed-income instruments, as they offer interest payments only when the underlying reference rate, such as LIBOR or an equity index, remains within a predetermined range. These notes are often employed in low-volatility environments, allowing investors to capitalize on stable market conditions.
For example, if a range accrual note is linked to the 3-month LIBOR and the rate stays between 1% and 3% over a given period, interest accruals are made; if it moves outside this range, no interest is accrued for those days. This structured product can be appealing to sophisticated investors looking for customized exposure to specific financial variables with the potential for enhanced returns.