I was looking at principal protected notes (PPN) at a bank (link: CIBC Principal Protected Notes). It says:
- The return of your CIBC PPN depends on the performance of the underlying assets. (It is possible that no interest may be payable)
- Regardless of performance, your full principal amount will be repaid at maturity
- Terms range from 3 to 8 years
Suppose I want a PPN. My question is: why should I buy one from a bank? What advantage do bank PPNs have over one that I create for myself?
As far as I am aware, I can create a PPN by:
- Buying a high quality bond (e.g. government bond).
- Using an amount equal to or less than the future coupon(s) from the bond to buy an at-the-money call option (e.g. LEAPS) on an index ETF.
With this arrangement, I cut out the middleman (i.e. the bank), I don't have to worry about the credit risk of the bank, and should I choose to, I will be able to liquidate the PPN at any time without having to wait for the "maturity".