Tutorial: Express Bonds

What are express bonds?

Express bonds offer an interesting coupon in sideways markets and the annual chance of early redemption at 100 % of the nominal amount. In addition, investors benefit from a risk buffer (=barrier). Express bonds are not capital guaranteed and investors bear the risk of the issuer.

Express bonds refer to an underlying, which is commonly an index or a stock. The term is usually several years. However, once a year there is the chance of a coupon payment and an early redemption at 100 % of the nominal amount.

How do express bonds work?

At the start of the term the strike price of the underlying is set. On the following annual valuation dates there is a check of the current price of the underlying. If the underlying is at or above the strike price on the valuation date, the express bond is redeemed early at 100 % of the nominal amount and interest is paid. If the underlying quotes below the strike price, the bond is not redeemed. Also, there is no interest payment. The following year the underlying price is again checked on the valuation date.

If there is no early redemption during the term, the barrier serves as additional risk buffer on the final valuation date. If the closing price of the underlying on the final valuation date is at or above the barrier, then the redemption is at 100 % of the nominal amount. In addition, missed coupons are paid. If the closing price of the underlying is below the barrier, there is no interest payment and redemption is according to the performance of the underlying. In this case, capital loss up to total loss of invested capital is possible.

Besides this standard express bond, there are variations that may differ from the above description. There are memory express bonds, fix coupon express bonds and multi express bonds, the latter refering to several underlyings. In case of multi express bonds, (early) redemption and coupon payment depend on the performance of all underlyings, i.e. all underlyings must be at or above the respective barrier / strike price on the valuation dates. In addition, express bonds may have an "airbag" function, which serves as additional protection upon maturity, reducing potential capital loss.

Fix coupon express bonds pay the coupon regardless of the performance of the underlying. Memory express bonds offer the chance of a coupon payment even though there is no early redemption. This is the case if the underlying is below the strike price but at or above the coupon barrier. In case the underlying price is below the coupon barrier, there is no coupon payment. However, the missed coupon is paid if the underlying price is at or above the coupon barrier on one of the following valuation dates (= memory function).

Your benefits

Express bonds offer the chance of an interesting coupon in sideways markets and the chance of an early redemption at 100 % of nominal amount. On the final valuation date, investors benefit from a risk buffer (=barrier), in case the underlying price has fallen. There is no capital guarantee and in case the underlying price is below the final redemption barrier on the final valuation date, there are capital losses.

Your advantages

Chance to earn an interesting coupon
Annual chance of early redemption at 100 % of the nominal amount
Investors benefit from a risk buffer compared to a direct investment in the underlying.
Memory express bonds pay missed coupons, if the closing price of the underlying is above the coupon barrier on the valuation date.

Risks you should be aware of

Investors bear the risk of the issuer.
During the term the bond price does not vary 1:1 with the underlying and premature sale may lead to capital loss.
Earnings are capped by the coupon payments, even if the underlying performs better.
If the closing price of the underlying is below the final redemption barrier on the final valuation date, there is a capital loss.
In case of several underlyings the risk of capital loss depends on the underlying with the worst performance. There is no risk diversification despite several underlyings in the basket.
Express bonds are not covered by any deposit guarantee scheme. Investors are exposed to the risk that Erste Group Bank AG may not be able to meet its obligations arising from the express bond in the event of insolvency or over-indebtedness or from an official order (bail-in regime). A total loss of invested capital is possible.

How do standard express bonds react to…

… rising underlying prices?
If the price of the underlying rises, the price of the bond rises as well because redemption of the nominal amount is becoming more likely. On the early redemption date investors receive the coupon payment as well as 100 % of the nominal amount.

… stable underlying prices?
With stable underlying prices express bonds display a stable price. If the underlying price is at or slightly above the strike price at the valuation date, investors receive the coupon payment as well as 100 % of the nominal amount.

… falling underlying prices?
With falling underlying prices also the price of the express bond falls. If the closing price of the underlying is below the strike price on the annual valuation date, the bond is not redeemed early. If at the end of term the underlying price is below the strike price but at or above the final redemption barrier, investors receive the nominal amount. However, if the underlying price is below the final redemption barrier, investors receive a redemption amount according to the performance of the underlying or stocks of the underlying are delivered. In this case, there is a capital loss.

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