SIDC Module 7 Structured products question: zero-coupon component yielding

SIDC Module 7Structured products

A three-year capital-protected note uses a zero-coupon component yielding 3.5% a year (annual compounding). Ignoring fees, how much of each RM100 is available to buy the option component?

A RM3.50
B RM9.81
C RM10.50
D RM90.19

Show the answer and explanation

Answer: B. RM9.81

The zero-coupon component must grow to RM100 in three years: 100 ÷ 1.035³ = RM90.19. The rest, 100 − 90.19 = RM9.81, buys the option. RM90.19 is the bond component itself. RM10.50 deducts three years of simple interest. RM3.50 is one year's interest. Source: SIDC Module 7 Study Outline (Jul-Dec 2026) Topic 8 Structured Products; J. C. Hull, Options, Futures, and Other Derivatives (as at October 2026).

Common mistake

Using simple interest to price the protected amount.

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A capital-protected note pays 100% of capital at maturity plus 70% of any rise in an index (participation rate 70%). The index rises 20% over the term. What is the investor's total return?A note with full capital protection at maturity pays 100% participation in an index's rise. The index falls 18% over the term. The investor holds to maturity and the issuer is solvent. What does the investor receive per RM100?A note pays 100% participation in an index's rise, capped at 15%, with full capital protection. The index rises 25%. What does the investor receive per RM100?

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