posted on 06-06-2019

Equity Linked Note (ELN)

Updated October 1, 2019

What is an Equity Linked Note (ELN)?

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 Does an Equity Linked Note (ELN) Work?

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 Does an Equity Linked Note (ELN) Matter?

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