|Just another ramp.....
We've put in a separate page for these because
site visitors may be looking for it. But they are just a specialised
form of Structured
Product, and everything we have to say about those instruments
applies to Precipice Bonds, in spades.
They offer a high 'guaranteed' income by the
simple expedient of increasing the capital risk. The 'precipice'
part of the bond exploits the human trait that we tend to discount
the small probability of large losses. One example from the FSA's
own booklet was a bond that offered guaranteed income of 6% per
annum, but subject to the following terms: if, at maturity, the
FTSE100 has fallen below its starting value the return of capital
will be reduced by 2% for every 1% fall in the index.
It is hard to construct an individual risk profile
that would make them a suitable investment. An investor who needs
a guaranteed income should not be leveraging his capital risk. Nevertheless
hundreds of millions of pounds of these 'bonds' were sold in about
Subsequently claims were made for mis-selling.
Lloyds TSB were fined, among others, and the David Aaron Partnership
was taken into administration partly (it is believed) under the
weight of claims for mis-selling these bonds. Even the British public
noticed that these bonds might not be good for their wealth, and
....until now. Some new ones have just been
launched. Investors have short memories.