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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Thursday, March 11, 2021

$ 1 Million Bond Portfolio with Upside Participation Notes

By Century Financial in Investment Insights

$ 1 Million Bond Portfolio with Upside...
$ 1 Million Bond Portfolio with Upside Participation Notes

*This performance is only observed with historical backtests and not traded by the company.

The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

The concept is based on reinvestment of coupons received from the below mentioned 4 bonds into the upside participation notes.
The participation notes are call strikes on currently trending US equities.
Bond prices as they move closer to maturity are subject to premium deterioration & also price fluctuations based on the underlying interest rate fluctuations. Calculations for changes in the current bond position holding on account of 1 % change in interest rates is as given below.
Other risks for the bonds including liquidity, credit & market as covered by the Investment grade rating provided by S & P.
Bond prices & premiums shown below for upside participation notes are as of product creation time (09/03/2021 – US Market close). These may vary at the time of actual execution depending upon the underlying market movement.
The coupon reinvestments in the participation notes are for sample purpose only. The investor has full discretion in altering & tailoring the coupon reinvestments as per his own requirement. For the below reinvestment portfolio, the investor may still be able to get 50 % of his coupon back post the premium paid for participation notes.


The product is based on investing $ 1 million in the below mentioned 4 bonds that are rated investment grade by S & P rating agency. The coupons received owing to these investments is then used to further participate in the upside price movement in the 4 below mentioned US equities. This is achieved by investing in At the Money call strikes (call Strikes that are very near to the current market price) for the respective underlying.

Bond selection is based on appropriate duration risk & coupon rates so as to lower the impact due to interest rate hikes. The bonds are S & P rating A & above (Investment Grade). For the 1 million $ investment, 40 % is allocated to US Treasury maturing < 1 year. The remaining 60 % is allocated to top US corporate names including Apple, Anthem & Abbot Laboratories.

Portfolio Statistics

Portfolio Statistics - Bond
Initial Investment $1,000,000
Face Value $980,000
Total Bonds 4
Average Maturity 12 Months
Weighted Average Coupon 2.12%
Gross Annual Coupon 20,725
Withholding Tax Rate 30%
Net Annual Coupon $14,508
Coupon Reinvestment Portfolio Statistics - Upside Participation Notes
Total Participation Notes 4
Participation Rate from Current Levels 100%
Total Premium Required for Call Participations $7,630
Average Expiry 10 Months

Net Coupon Available Post Participation - $ 6,877

* The above coupon reinvestments in participation notes are for sample purpose. It would be on client's discretion to alter/tailor the reinvestment portfolio

Portfolio Statistics

Bond Portfolio Statistics

Porfolio Size $1,000,000
Total Bonds 4
Composition Mix of 1 Year UST + US Investment Grade Corporate Bonds
Sr No CUSIP Bond Issue Last Price (As of 09/03/2021 Market Close) Expiry Modified Duration Coupon Rate Current Yield Effective YTM Mid S&P Rating Tentative Next Coupon Date Make Whole Provision Active Weightage Effective Allocation (Par Value) Actual Buying Value - Principal( Amount Required based on the Last Price & Par Value Annual Coupon Weighted Average Portfolio Coupon DVO Measure Net Change in Bond Postion Holding Valuation in Case of 1% interest rate change
1 912828ZA1 US Governnment Treasury Note 1.125 28/02/2022 $101.0015 28/02/2022 0.975 1.125% 1.1400% 0.0912% Aaa August'2021 40% $398,000 $401,986 $4,477.50 0.452% $39.19 $3,919.36
2 037833BF6 Apple 2.7 13/05/2022 $102.7600 13/05/2022 1.54 2.7000% 2.6240% 0.2170% AA+ May'2021 Yes 20% $194,000 $199,354 $5,238.00 0.538% $30.70 $3,070.06
3 002824BA7 Abbot Laboratories 2.55 15/03/2022 $102.0100 15/03/2022 0.9936 2.5500% 2.4900% 0.3827% A March'2021 Yes 20% $194,000 $197,899 $4,947.00 0.505% $19.66 $1,966.33
4 94973VAX5 Anthem 3.125 15/05/2022 $103.1200 15/05/2022 1.156 3.1250% 3.0270% 0.3837% A June'2021 Yes 20% $194,000 $200,053 $6,062.50 0.625% $23.13 $2,312.61
$980,000 $999,293 $20,725 2.120% $11,268.36
- For US bonds , the coupons are paid Semi Annually Withholding Tax 30%
- Intial Margin Requirements for corporate bonds is 50%. This may further vary as per the discretion of platform provider & market volatility Net Coupons $14,507.50

Bond Porftfolio

Coupon Reinvestment – Participation Notes Rationale

Ticker Code Stock Last Close (As of 09/03/2021 - US Market Close) View Duration (10 Months Expiry) Upside Pariticpation Rate from Current Level Knock In Strike Premium / Unit Net Premium(1 Lot = 100 Units Exposure) Rationale Bloomberg Analyst Recommendation (Buy | Hold | Sell)
JPM US Equity JP Morgan $151.83 Bullish January'21, 2022 100% $150.00 $16.50 $1,650.00 The company's share price have rallied by over 9 % in the current tech led selloff. One of the primary reasons for the rally happens to be rise in US 10 year yields which is supportive for the bank's bottomline. Last month, the stock broke above its previous life time highs. This is in contrast to other major US banks like BoA & Wells Fargo which are still trading below their previous life time highs. 19|7|3
CCL US Equity Carnival Corporation $27.58 Bullish January'21, 2022 100% $27.50 $7.60 $760.00 The stock suffered heavily last year with losses of 55%. However, ever since the vaccination programs have started, the stock along with other reopening theme based stocks have rallied. On YTD basis, the stock is up by 25% indicating strong investor preference for such stocks. While the company has suffered lot of de- growth due to pandemic, it's strong brand presence would ensure the cruise liner benefitting the most from pent up holiday booking demand. 3|10|5
ARKK US Equity ARKK Innovation ETF $121.75 Bullish January'21, 2022 100% $120.00 $24.20 $2,420.00 Investor darling and bet on futuristic & innovative technologies - ARKK ETF has been in news currently for its sizeable fall of 30% since its peak seen in mid February. Led by Tesla's decline , the ETF has also suffered sizeable outflows on account of major correction in tech stocks. While the current selloff has been ascribed to rise in US 10 year bond yields and money rotation back to traditional/cyclical stocks, chances of recovery in such stocks cannot be ruled as markets come to terms with current leg of profit booking in tech stocks. --N.A--
DIS US Equity Walt Disney Co $194.51 Bullish January'21, 2022 100% $190.00 $28.00 $2,800.00 Another strong brand as a part of reopening portfolio, the stock has broken above its life time high with a breach above $ 200 level. The stock has been rallying since November on back of renewed hopes on post vaccine related reopening & recovery theme. US State of California recently allowed theme parks to open albeit with minimum capacity constraints. This is a huge positive for Disney whose theme park segment has acted as a major drag on the company's balance sheet since last 1 year. Latest earnings for the company beat the analyst expectations with Disney + subscriptions higher than expected. 26|6|2

Participation Notes Summary

Participation Notes Performance

Participation Notes Payoff

Participation Notes Performance

Risks & Assumptions

The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Prices & Statistics as of: 09/03/2021 US Market Close

Arun Leslie John
Chief Market Analyst

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