A principal protected note (PPN) is a fixed-income security that guarantees the investor a return equal to their initial investment. This principal balance is protected regardless of how any underlying assets perform. If you are a risk-averse investor, this type of financial product may be right for you. Here is what you need to know before investing in a PPN.
PPNs are structured finance products that guarantee a rate of return as long as the note is kept until it is mature. With this type of arrangement, the company that holds the PPN makes no interest payments until the bond matures. You may have the option of a payoff, but that option will be tied to the performance of a linked asset, index or benchmark.
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The downside of PPNs is that the guarantee is subject to the trustworthiness of the entity that is issuing the PPN. If the issuer goes bankrupt or defaults on all or most of its payments, the investor may lose their principal. In all regards, the PPN is unsecured debt, so it is necessary to choose creditworthy vendors that will be able to provide you with a return on your principal investment.
Investors should also be cautious that the notes can have long-term maturities, and the investor must hold the note for the entire time to receive their full payout. This can tie up the investors’ funds for a significant period of time, so it is important to weigh the benefits and risks of PPNs. Also keep in mind that early or partial withdrawals may be subject to penalty charges.
PPNs are a safe investment option, and arguably safer than annuities. Though, annuities are far more flexible and offer a greater advantage than PPNs in most cases. Indexed annuities can allow your funds to appreciate, making it possible to build significant retirement wealth through the account. Similarly, fixed annuities offer you a guaranteed interest rate that will let you accumulate tax-deferred money. Which option is best depends on your unique preferences, so seek financial advice before making your decision.
There are many financial products on the market, and each one has its own unique advantages and disadvantages. If you are interested in bolstering your retirement strategy with new financial services, you should understand what options you have available, as well as their pros and cons.