Equity & Commodity linked debentures
What is Equity Linked Debentures (ELDs)?
Equity Linked Debentures (ELDs) are floating rate debt instruments whose interest relies on the returns of the underlying equity asset such asS&P Sensex, individual stocks, Nifty 50 or any customized basket of individual stocks.
The issuer of bond put in a preset part of the principal amount collected in fixed income securities like bonds, which provide principal protection while the balance is used to the exposure to returns of equity which provided by the buy options.
Consequently, these instruments are in general structured in a way to give 100% capital protection with a provision for equity participation to the investors.
Capital Protection should not be treated as non-existence of credit risk (risk of default by issuer). These instruments still carry credit risk and consequently rated by credit rating agencies.
What isCommodity Linked Debentures (CLDs)?
Similar to ELDs, CLDs are floating rate debt instruments whose interest relies on the returns of the underlying commodity asset.
Despite the fact that the returns can be linked to any commodity, most of these papers globally are linked to precious metals – Gold and Silver.
Similar to ELDs, 100% capital protection with a provision for participation in commodity markets are the rewards of CLDs.