Fixed income notes

Fixed income notes video

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In this installment of our Scotiabank Investor Solutions product series, we will discuss Fixed Income Notes. What are they and how do they work? Fixed Income Notes are alternative investments to traditional fixed or floating rate bonds. These products are designed for investors requiring the return of 100% of the principal invested, access to daily liquidity, and are seeking the opportunity of earning above-market returns relative to traditional fixed income instruments of comparable maturity and credit quality.

Let’s look at some common products. Extendible Fixed Coupon Notes. These products are designed for investors who require cash flows and are seeking enhanced coupons, by giving the Bank the right to extend the maturity of the note beyond its initial maturity date. In our first example, we have a note with an initial maturity of 2 years that will pay an annual coupon of 5%.

The maturity date can be extended to up to 10 years at the option of the Bank. At the initial maturity date, the Bank provides notice of its intention to redeem the note and not to extend the note’s maturity date. The investor therefore receives their principal back at the end of year 2 along with their interest. In the second scenario, the Bank does not provide any notice of its intention to redeem the note on the initial maturity date.

However, the Bank decides to redeem the note in year 8. Because of the extension feature, there is no certainty as to the term to maturity after the initial maturity date. The investment comes to an end. Now, we’ll explore Extendible Step-Up Coupon Notes.

These products are similar to Extendible Fixed Coupon Notes in that an investor will receive regular coupon payments until the initial maturity date. Through the life of note, the coupon will periodically increase until the final maturity date. The extension feature works in the same manner as Extendible Fixed Coupon Notes. Next, we’ll look at Callable Accrual Notes.

Accrual products are designed for investors who do not require cash flows and are seeking a one-time enhanced payment at maturity, by giving the Bank the right to call the investment early before its maturity date, a feature that differentiates the product from traditional bonds. These products can come in two forms: Linear Accruals, where interest is not compounded through the life of the note and Compound Accruals, where interest is compounded periodically through the life of the note. In this example, we’ll look at a 10-year linear accrual that has an annual interest rate of 6% per annum.

The note is redeemable annually at the option of the Bank on each call date. If the note is called prior to the maturity date, investors will receive a single payment of principal and interest accrued up to the specific call date. In the first scenario, the note is not called, and the investment continues to the maturity date. Here, the investor will accrue interest at the 6% annual coupon rate for the full 10 years and the final interest rate of 60% is payable only once on the maturity date together with the principal amount.

In the second scenario, the note is called on the first call date. The investor receives the interest rate of 6% to the first call date together with the principal amount. We will now look at a compound accrual note that offers an annual interest rate of 5%. In this example, the note is not called and accrues interest at the 5% rate, compounded annually for the full 10 years.

The final interest rate of 63% is payable only once on the maturity date together with the principal amount. In the second example, the note is called in year 3. The note accrues interest at the 5% annual coupon rate, compounded annually, for 3 years. Interest of 16% is payable once on the third call date, together with the principal amount.

Investors should be aware that the principal is repaid on the notes if held to maturity. If an investor sells the Notes prior to maturity, they may receive proceeds that are less than their initial investment amount. Scotiabank also offers these products in the form of Guaranteed Investment Certificates, or GICs. These investments have the addition of CDIC insurance eligibility but give up the access to daily liquidity.

For more information, speak to your Scotiabank representative.

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Important Information: An investment in Deposit Type Instruments or Guaranteed Investment Certificates (GICs) may not be suitable for all investors. Important information about these investments is contained in the Information Statement, Pricing Document or Terms & Conditions as applicable for the note. Investors should obtain and carefully read a copy of these documents prior to investing, paying particular attention to the associated risks.

This presentation represents information of a public nature. This material is for general informational purposes only and does not constitute an invitation, offer, solicitation or inducement to buy or sell any securities or deposits of The Bank of Nova Scotia (“BNS” or the “Bank”) in any jurisdiction. This presentation does not constitute investment advice or any form of recommendation and should not be construed as such. No securities commission or regulatory body has passed upon the accuracy or adequacy of this presentation. Any representation to the contrary is a criminal offense. Except as otherwise indicated, this presentation speaks as of the date hereof. The delivery of this presentation shall not, under any circumstances, create any implication that there has been no change in the affairs of BNS after the date hereof. Certain of the information contained herein may be derived from information provided by industry sources. While BNS believes that such information is accurate and that the sources from which it has been obtained are reliable, it has not independently verified data from these third-party sources. BNS does not provide any tax, accounting or legal advice and in all cases independent professional advice should be sought in those areas.

The information in this document is provided as of the date hereof and in furnishing this document BNS does not undertake any obligation to update or correct any information contained herein. Historical performance will not necessarily predict future performance of the return on the Notes. Reference is made to the Base Shelf Prospectus and applicable Prospectus Supplement and/or Pricing Supplement, if and when filed, and/or Information Statement or Term Sheet which sets out the specific terms and risk factors associated with an investment in the Notes. Nothing in this document contains a commitment by BNS to sell, issue, purchase or subscribe for financial instruments, or securities, to provide debt or to invest in any way in any transaction described herein, or otherwise provide monies to any party.

Notes do not constitute deposits that are insured under the Canada Deposit Insurance Corporation Act (the “CDIC Act”) or under any other deposit insurance regime.

Depending on the offering, Notes may be subject to bail-in conversion under the Canadian bail-in regime.

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What are fixed income notes?

Fixed income notes, also known as interest rate-linked notes, are alternative investments to traditional fixed or floating rate bonds.

This investment is designed for investors requiring a return of the principal amount invested, while still seeking the opportunity of earning above-market returns relative to traditional fixed income instruments of comparable maturity and credit quality.

Common fixed income note structures

1. Extendible fixed coupon notes

This product is designed for investors who require cash flows and are seeking enhanced coupons, by giving Scotiabank the right to extend the maturity of the note beyond its initial maturity date.

Illustrative example

Scenario 1

In this example, we have a note with an initial term to maturity of 2 years with an annual coupon rate of 5% per annum. Scotiabank has the option to extend the maturity date of the note annually after the initial term, to a maximum of 10 years.

At the initial maturity date, Scotiabank notifies the investor of its intention not to extend the maturity of the notes, and the notes are redeemed. The investor therefore receives their principal back at the end of year 2, and no further coupon payments will be made.

The note redeems at the initial maturity date at year 2 and 100% of the principal amount is returned to the investor.

Scenario 2

Here, Scotiabank does not provide any notice to the investor of its intention to redeem the note on the initial maturity date. Due to the extension feature of the note, there is no certainty with respect to the term to maturity after the initial maturity date. Here, Scotiabank decides to provide notice and redeem the note in year 8.

The note extends beyond the initial maturity date at year 2. The note matures in year 8, and 100% of the principal amount is returned to the investor along with the related coupon payment.

2. Extendible step-up coupon notes

This product is similar to an extendible fixed coupon note. It pays a regular enhanced fixed coupon until the initial maturity date. However, if the Scotiabank does not redeem the note on the initial maturity date, the coupon will increase, or step up, on each extended maturity date up to the final maturity date.

The note extends beyond the initial maturity date at year 2, with the coupon rate increasing in increments at each extended maturity date up to the final maturity date in year 10.

3. Callable linear accrual notes

This product is designed for investors who do not require cash flows during the term of the note, and are seeking a one-time enhanced payment at maturity, by giving Scotiabank the right to call the note early before the maturity date.

These notes can come in two forms: compound accruals, where interest is compounded through the term of the note, or linear accruals, where interest will accrue linearly and will not compound through the term of the note.

A series of yearly potential call dates and red and blue bars. The blue bars show the callable linear accrual notes increasing in value over time, while the red bars show the callable compound accrual notes where interest is compounding through the term of the note.

In this example, we have a linear accrual note with a term of 10 years and a 6% interest rate per annum. The note is redeemable at the option of Scotiabank annually on the call dates. If the note is called prior to the maturity date, investors will receive a single payment of principal and interest accrued linearly up to the specific call date.

Scenario 1:

In this scenario, the note is not called, and the investment continues to the maturity date. Here, the investor will accrue interest at the rate of 6% per annum for the full 10-year term of the note. The interest amount of 60% of the principal amount is payable only once on the maturity date together with the principal amount.

The note is not called. It accrues interest at a 6% annual interest rate for the full 10-year term of the note and the interest amount of 60% of the principal amount is payable on the maturity date, together with repayment of the principal amount.

Scenario 2:

In this scenario, the note is called on the first call date. The investor receives the interest amount of 6% on the first call date together with the repayment of the principal amount.

The note is called on the year 1 call date, and the note accrues interest at the 6% annual coupon rate for one year and the interest amount is 6% payable together with the repayment of the principal amount.

4. Compound accrual notes

Scenario 1:

Now, we have a compound accrual note that continues until maturity. Here, the investor will accrue interest at the 5% annual coupon rate, compounded annually, for the full 10 years and the final interest amount of 63% is payable only once on the maturity date together with the repayment of the principal amount.

The compound accrual note reaches maturity and the investment interest accrues at a rate of 5% compounded annually, for the full 10-year term of the note. The final interest amount is approximately 63% payable only once on the maturity date with the repayment of the principal amount.

Scenario 2:

In this scenario, the note is called in year 3. The investor will accrue interest at the 5% annual coupon rate, compounded annually, for 3 years. The interest of 16% is payable once on the third call date, together with the repayment of the principal amount.

The note is called on the year 3 call date and the note accrues interest at the 5% annual coupon rate compounded annually, for 3 years. The interest amount is approximately 16% payable of the year 3 call date, together with the repayment of the principal amount.

The principal amount is repaid only if the product is held to maturity. If an investor sells the notes in the secondary market prior to maturity, the investor may have to do so at a discount from the principal amount, even if the performance of the underlying asset has been positive.

Scotiabank also offers these structures in the form of Guaranteed Investment Certificates, or GICs. These investments have the addition of Canada Deposit Insurance Corporation (CDIC) insurance eligibility but give up the access to daily liquidity.

When to consider fixed income notes

Fixed income notes provide enhanced yield potential over traditional bonds. These products can be customized based on an investor’s market outlook and term preferences.

Cash flow needs

Fixed income notes provide cash flows in the form of extendible fixed coupon or extendible step-up coupon notes. These products can be customized to fit an investor’s payment schedule needs. If investors do not require cash flow, they may consider accruals, which may further enhance yield by providing a single cash payment of principal and interest at a call date or at maturity.

Term preference

Fixed income notes are typically intended to be held until maturity. A sale of a note in the secondary market may be subject to an early trading fee, or loss on the principal amount invested, or both.

Benefits of fixed income notes

Enhanced returns: Investors have the potential to earn above market returns in exchange for Scotiabank’s option to extend the note maturity or option to call the note prior to maturity
Principal repayment: 100% of the principal invested is repaid on a call date or at maturity
Diversification: Notes can be structured to have low correlation with traditional fixed income investments and can be linked to a variety of interest rate benchmarks
Customization: Notes can be tailored to express an outlook on forward interest rates or the shape of the yield curve, or to hedge an investor’s existing interest rate exposure
Duration: Investors can tailor notes to a targeted duration strategy without a significant yield compromise

Risks of fixed income notes

Reinvestment risk: Fixed income notes may be called at the discretion of Scotiabank, potentially subjecting investors to re-invest at lower yields
Credit risk: Scotiabank structured notes are debt obligations of Scotiabank and are subject to the Bank’s creditworthiness
Interest rate risk: The secondary market price of the notes is sensitive to changes in benchmark interest rates
Expiry considerations: Investors should know their investment time horizon and select a note with an appropriate term
Tax considerations: Investing in interest rate structured notes may have tax implications for the investor
CDIC considerations: Fixed income notes are not insured by the Canada Deposit Insurance Corporation and may be eligible for CDIC insurance if issued in the form of a Guaranteed Investment Certificate (GIC)

Get expert advice

Structured notes are flexible and customizable to meet your unique investment needs and risk-return objectives. Speak with an advisor to discuss how structures can be tailored specifically for you.

Legal disclaimers

Scotiabank is the brand name under which The Bank of Nova Scotia (the “Bank”) and its subsidiaries and affiliates (including, without limitation, Scotia Capital Inc.) offer products and services globally. Securities and other products offered or sold by Scotiabank involve investment risks, including the potential loss of principal. Each subsidiary or affiliate of the Bank is solely responsible for its own contractual obligations and commitments. Unless expressly stated otherwise, Scotiabank products and services are not insured by the Canada Deposit Insurance Corporation, the Federal Deposit Insurance Corporation, or any similar deposit insurance, nor are they endorsed or guaranteed by any bank. The information provided herein is for informational purposes only and is presented “as is,” without any warranty, either express or implied, to the fullest extent permitted by applicable law. This includes, but is not limited to, warranties of merchantability, fitness for a particular purpose, accuracy, completeness, timeliness, or non-infringement. The data and information herein are sourced from sources deemed reliable but have not been independently verified by the Bank. Consequently, the Bank does not guarantee their accuracy or completeness and assumes no obligation to update any content, assumptions, opinions, or statements contained herein. The securities, products, and services described in this document may not be available to or suitable for all investors. These materials do not and are not intended to disclose all risks or other material considerations related to the securities, products, or financial instruments discussed. Nothing herein constitutes financial, business, legal, tax, investment, regulatory, or accounting advice. Before making any investment, you are encouraged to independently assess the risks, consulting professional advisors (such as legal, tax, financial, or other experts) as necessary. This document does not constitute an offer to sell or a solicitation to purchase the investment products described. Terms of any actual offering will be detailed in the relevant offering documentation provided to investors. Examples or projections included herein are for illustrative purposes only and are not intended to predict actual performance, which may differ significantly. Historical performance or trends described are not indicative of future results. There are no guarantees regarding market performance or outcomes similar to those discussed. The Bank and its affiliates expressly disclaim liability for any direct, indirect, incidental, special, or consequential losses or damages arising from reliance on this document, including (but not limited to) lost profits, revenue, or failure to realize expected savings. The Scotiabank logo and “The Bank of Nova Scotia” are trademarks of the Bank, used under license (where applicable).

Fixed income notes