Callable Range accrual notes

Instrument where the coupon accrues at a pre-set rate as long as the reference rate stays within a pre-established collar. Otherwise a below market rate, typically 0%, is applied. Upon call or maturity, the entire principal is returned to the investor. The issuer has the option to call the note at specified dates in the future, typically at par. For example, if the investor has predicted movements in the reference rate correctly and is obtaining high return, then the issuer has the right to call the note and return the principal to the investor. Some of the risks associated with these investments
Credit worthiness of the issuer.
Chance of default.
Call provisions.

There is some risk associated with the embedded call clauses, which are often set at two years instead of one. The tradeoff is that the coupon rate is typically lower in the first year. The issuer offers the investor a higher potential return in order to compensate the investor for these risks.

Callable range accrual notes are structured to perform best when interest rates are low. Historically, in time of low interest rates, equity performance is also below average. Issuers look to call these notes when interest rates stay low. When rates remain within the pre-determined ranges, investors receive a premium coupon greater than current funding rates. Volatility that causes rates to rise above the range will usually bring funding rates above the payment obligation. If called early, you would have received a coupon rate that exceeded current market conditions for a period of time and you are in a position to invest in another note with similar potential.