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What is an Accelerated Return Note (ARN)?

What is an Accelerated Return Note (ARN)?

An accelerated return note (ARN) is an unsecured debt instrument that uses derivatives to offer leveraged returns and minimal loss exposure to retail investors.

Accelerated Return Notes came onto the scene around 2010-2012. They are a form of structured note marketed primarily by Merrill Lynch and Bank of America.

They were packaged as offering “accelerated” returns on familiar indexes and stocks. The way such returns are generated is by taking up 2x or 3x positions in calls and futures on the index or stock of choice.

The investor gets 2x or 3x the gains of the index, up to a participation limit, and only has 1:1 exposure to the downside. The investor’s participation is capped somewhere between 18% and 25%, and the returns above that amount are where the banks offering these products make their money.

The majority of these contracts made the scene in 2011 and expired in 2013. Some structured notes offered principal protection, similar to indexed annuities and other financial products, but ARNs exposed the investor to 100% principal risk.

These products were not traded on exchanges and offered little-to-no liquidity. They must not have done well enough to keep these products on offer, because we can’t seem to find them now.

Keywords: leverage, derivatives, Futures, calls, structured notes, unsecured debt, participation limits, leveraged instruments,