Targeted Accrual Redemption Note
A targeted accrual redemption note (TARN) is an exotic derivative that terminates when a limit on coupon payments to the holder is reached.Target accrual redemption notes (TARN) have the distinguishing feature of being subject to early termination. If the accumulation of coupons reaches a predetermined amount before the settlement date, the holder of the note receives a final payment of the par value and the contract ends.
Definition: A Target Accrual Redemption Note (TARN) is a type of financial derivative that terminates early when the cumulative coupon payments to the holder reach a predetermined limit. The unique feature of a TARN is its early termination mechanism: if the cumulative payments reach the target amount before the settlement date, the holder receives a final payment of the face value, and the contract terminates.
Origin: TARNs originated during the financial innovation wave of the 1980s, designed to offer investors a high-yield potential investment tool with controlled risk. As financial markets evolved, TARNs became widely used in various investment portfolios, especially in environments with significant interest rate and exchange rate volatility.
Categories and Characteristics: TARNs can be categorized based on different underlying assets and payment structures:
- Interest Rate TARN: Based on interest rate fluctuations, suitable for the interest rate market.
- Currency TARN: Based on exchange rate fluctuations, suitable for the forex market.
- Commodity TARN: Based on commodity price fluctuations, suitable for the commodities market.
- Early termination mechanism, reducing long-term holding risk.
- Complex payment structures, usually related to market volatility.
- Suitable for investors with a higher risk tolerance.
Case Studies:
- Case 1: An investor purchases a TARN based on the USD/EUR exchange rate, with a target cumulative payment of 10%. Due to significant market volatility, the exchange rate fluctuations cause the cumulative payments to reach 10% in a short period, leading to early termination of the note, and the investor receives a final payment of the face value.
- Case 2: A company buys a TARN based on interest rates, with a target cumulative payment of 8%. Due to rising market interest rates, the cumulative payments reach 8% within a year, causing the note to terminate early, and the company receives a final payment of the face value.
Common Questions:
- Q: Under what conditions will a TARN terminate early?
A: A TARN will terminate early when the cumulative payments reach the predetermined target amount. - Q: What type of investors are TARNs suitable for?
A: TARNs are suitable for investors with a higher risk tolerance and expectations of market volatility. - Q: How is the cumulative payment of a TARN calculated?
A: The cumulative payment is usually based on the performance of the underlying asset, with specific calculation methods detailed in the contract.
