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Discount Certificates

What are discount certificates?

Discount certificate are debentures through which the investor acquires an underlying instrument at a discount to the direct investment. At the beginning of the term a cap is set which limits the potential return. Upon maturity the current price of the underlying instrument is paid out, with the cap representing the upper limit of the payout.

This is the advantage of discount certificates – since the investor in a discount certificate buys the share at a discount to its current price but gets the full share price (limited by the cap) paid out at maturity, the investor can earn the so-called sideways yield. Please keep in mind the respective exchange ratio.

How do discount certificates work?

The potential return from discount certificates is capped. In return for this cap (and thus, for the unlimited potential return), the investor gets to buy the specific underlying at a discount. This means that you pay a lower price for the discount certificate than you would pay for investing directly in the underlying. Upon maturity the current price of the underlying instrument is paid out (while bearing in mind the exchange ratio), with the cap representing the upper limit of the payout. The cap is set at the beginning of the term, remains constant over time, and marks the maximum return potential.


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