Products Precipice Bonds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 1998-2003.

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 they disappeared....

....until now. Some new ones have just been launched. Investors have short memories.

 

 

 

 

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