PrincipalPrincipal The total amount of money that you invest, or the total amount of money you…+ read full definition protected notes (also called linked notes or return notes) are designed to protect your original investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition and return it to you after a set period of time (usually 3 to 10 years) – no matter how the market performs. If the market performs well over the period, you will shareShare A piece of ownership in a company. A share does not give you direct control…+ read full definition in any gains.

PPNs do this by buying insurance to cover the amount of your principal investment and then investing your money in an underlying investment tied to the PPN. Underlying investments can include stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or…+ read full definition indexes, mutual funds or even hedge funds.

Financial institutions must give you key information about a PPN before you investInvest To use money for the purpose of making more money by making an investment. Often…+ read full definition. They must also keep you informed about your investment. Learn about your rights as an investor.

3 advantages of PPNs

1. Lower risk – PPNs are marketed as a safe investment for investors who want to invest in the markets but don’t want to risk losing money.
2. Guaranteed principal – PPNs will pay back at least your principal amount at maturity.
3. Regular income – Some PPNs make regular payments before the maturity dateMaturity date The date when an investment becomes due. On that date, you get your money back…+ read full definition.

4 disadvantages of PPNs

1. High fees – In addition to sales commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales…+ read full definition and early redemption fees, PPNs may charge management fees, performance fees, structuring fees, operating fees, trailer feesTrailer fees Trailer fees are paid to salespeople monthly or quarterly for giving investment advice and other…+ read full definition, and swap arrangement fees.
2. Your money is locked in – PPNs guarantee your principal, but only if you stay invested until the end of the termTerm The period of time that a contract covers. Also, the period of time that an…+ read full definition (up to 10 years). If you want to get your money out sooner, you could pay a penalty and you could lose the guarantee on your principal. You could also lose money if the investment has not performed well.
3. InflationInflation A rise in the cost of goods and services over a set period of time.…+ read full definition – PPNs guarantee investors will get their principal back in 10 years even if the underlying investment does poorly. But inflation will reduce the buying power of that money.
4. The guarantee is only as good as the company offering it – Is the guarantee offered by a reputable financial institution? If the guarantor goes out of business, the guarantee on your principal may be worthless. Even though PPNs are sometimes referred to as deposits, are usually not insured by the Canada Deposit Insurance Corporation (CDIC) or the Autorité des marchés financiers (AMF).

Fast facts

Principal protected notes are also known as linked notes or return notes.

Caution

PPNs guarantee to give you your principal back in 5 or 10 years, but inflation will reduce the buying power of that money.