Tracker Bonds

Life Assurance companies offer structured investment bonds (tracker bonds), that aim to allow investors participate in equity market returns with the benefit of a high level of capital guarantee. They are fixed term bonds, usually between 3 to 6 years.

Structure

The investment made by an investor in a deposit Tracker Bonds is split into three components:

• Most of the deposit is placed with the Bank at a fixed rate for the term of the Bond, to provide the level of capital guarantee promised.

• Part is used by the Bank to purchase a derivative from a large international investment bank, who in return undertakes to pay the Tracker Bond bonus amount, if any, to the bank at the end of the Bond term.

• The balance of, the investment amount is taken as initial charges; part of which may be used by the Bank to pay commission to deposit brokers.

So a Tracker Bond is essentially a fixed rate term deposit as, usually, more than 80% of the investment amount is in fact invested in a fixed interest term deposit, for the term of the Bond.

Access to funds

Tracker Bonds are illiquid investments i.e. there is no facility for the investor to encash the bond before the maturity date. The funds are tied up for the term of the Bond.

Limitations

• The investment must be maintained for the full term in order to obtain the full guarantee and bonus promised.

• Generally no access to the investment during the term of the bond.

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