Equity Linked Note

What It Is:

An equity linked note (or ELN) is a debt instrument that varies from a standard fixed-income security in that the coupon is built on the return of a single stock, basket of stocks, or equity index, otherwise known as the underlying equity.

How It Works/Example:

An ELN is a principal-protected instrument generally intended to return 100% of the original investment at maturity, but deviates from a typical fixed-coupon bond in that its coupon is governed by the appreciation of the underlying equity.

An ELN has fixed-income features, like principal protection, as well as equity market upward exposure. It is structured by combining the economics of a long call option on equity with a long discount bond position. The investment structure generally offers 100% principal protection. The final payment at maturity or coupon is determined by the appreciation of the underlying stock.

Why It Matters:

The ELN is appropriate for conservative equity investors or fixed-income investors who desire equity exposure with controlled risk.