Digital notes see surge as volatility increases; Goldman brings digital notes tied to S&P 500

By Sheri Kasprzak

New York, Sept. 30 - As volatility rises, investors might be moving toward safer bets including digital notes that provide fixed returns rather than returns based upon participation, said Suzi Hampson, structured products analyst with Future Value Consultants.

"We call it digital because you either get the return or you don't," Hampson said Friday.

"If it's above the buffer, you get it, and if it's below the buffer, you don't."

There has been an increase recently in the number of these types of deals, Hampson noted, and they tend to be more popular in volatile markets.

"When volatility is quite high, you get a better return on these than with a growth product," she said.

More bullish investors, however, might seek out a growth product if they believe the underlying index is going to grow substantially and are more willing to take the risk, she noted.

Goldman Sachs goes digital

Goldman Sachs Group, Inc. has priced or plans to price several of these types of deals. The investment bank recently priced $8.73 million of 0% buffered equity index-linked notes due Oct. 26, 2012 linked to the S&P 500 index.

The notes pay 8.45% if the final index level is equal to or greater than 80% of the initial index level. If the final index level is less than 80% of the initial index level, investors will lose 1.25% for every 1% that the index declines beyond 20%.

Another deal ahead

In a similar deal, the investment bank will sell 0% buffered equity index-linked notes tied to the S&P 500 with a 12- to 14-month term.

If the index increases or if it falls by up to 20%, the payout at maturity will be the maximum settlement amount of between $1,080 and $1,094 per $1,000 principal amount. Investors will lose 1.25% for each 1% decline beyond 20% .The exact deal terms will be set at pricing.

Leveraged alternative

For the more bullish investor, Goldman Sachs will price 24- to 27-month 0% leveraged buffered index-linked notes linked to the S&P 500. Those notes pay par plus 150% of any index gain up to a maximum of between $1,375.00 and $1,438.75 per $1,000 principal amount of notes.

If the index falls by up to 10%, investors will receive par. Investors will lose 1.1111% for every 1% the index declines beyond 10%.

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