What is an equity-linked note (ELN) and how does its payoff differ from a PPN?

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AcadiFi · Accepted Answer

An equity-linked note ties coupon or principal repayment to an equity underlying without full principal protection. Harborline Securities might issue a 2-year ELN referencing Volta Motors stock at $80. Terms: investor pays $1,000; if Volta stays above $68 (15% buffer) at maturity, investor receives $1,100 (10% fixed return); if Volta closes below $68, investor receives shares worth roughly (Volta_final / 80) × $1,000 — potentially much less than par. Structurally, an ELN is a bond plus a short put option. The investor effectively sells downside protection to the issuer in exchange for enhanced yield. Compared to a PPN which is bond-plus-long-call (capped upside, protected downside), an ELN is bond-plus-short-put (capped upside, unprotected downside). Risks for ELN investors: (1) principal loss if the underlying crashes below the buffer, (2) no participation in upside beyond the fixed coupon, (3) issuer credit risk, (4) dividend forfeiture — investor doesn't receive Volta's dividends during the term. ELNs appeal to yield-starved investors willing to accept equity downside for enhanced fixed income.

What is an equity-linked note (ELN) and how does its payoff differ from a PPN?

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