Yield enhancement

Yield enhancement products offer you the advantage of guaranteed coupon payments and a positive yield in sideways markets. The two most important yield enhancement products are reverse convertibles (Julius Baer's designation: ICE units, which stands for Income Cash or Equity units) and discount certificates (Julius Baer's designation: ToY units for Title or Yield units, and CoY units for Currency or Yield units).

Yield enhancement products – how they work

While reverse convertibles come with a guaranteed coupon, discount certificates can be purchased at a price lower than that of the underlying security. The maximum returns with reverse convertibles and discount certificates are equally high if both products are based on the same underlying security and have identical strike prices and expirations. Depending on how the price of the underlying security develops, at the expiration date there is a repayment of the invested amount or a delivery of the underlying security.

Reverse convertible / discount certificate The diagram illustrates the payment profile, which is identical for a reverse convertible and a discount certificate.

Yield enhancement is the right investment solution if you

• want to pursue a yield-oriented investment strategy
• are looking for an alternative to direct investments
• expect that the underlying security will trade sideways or slightly higher

Due to the optimized returns in sideways tending markets, you can participate in sharply rising prices of the underlying security only to a limited extent.

	Reverse Convertibles		Diskont-Zertifikate
Construction	Bond and sale of a put option The coupon is financed with the premium from the sale of the option and the interest on the money market investment.		Underlying security and sale of a call option You receive the dividends due and the premium earned upon sale of the option via the discount in price.
Repayment at expiry	The repayment is determined by the price of the underlying security. You receive the coupon in all cases. If at expiry the price of the underlying security is above the strike price, you receive repayment of the capital. If the underlying closes below the strike price, you receive – depending on the conditions of the product in question – either delivery of the underlying security or a cash settlement.		The repayment is determined by the price of the underlying security. If at expiry the underlying is trading at or above the strike price, you receive repayment of the discount certificate at the strike price. If at expiry the underlying is trading below the strike price, you receive – depending on the conditions of the product in question – either delivery of the underlying security or a cash settlement.

Barrier reverse convertibles

Barrier reverse convertibles (Julius Baer's designation: ICE units with a knock-in) behave in a similar fashion to reverse convertibles except that they include a risk buffer. However, if the price falls below a predefined level or hits the barrier, the product converts into a normal reverse convertible.

Multi Barrier Reverse Convertible One variant of the barrier reverse convertible is the multi barrier reverse convertible (Julius Baer's designation: double, triple, quadruple and quintuple ICE units). Here the products are based on multiple underlying securities, and that structure allows higher coupons or a lower barrier but with higher risks.