Bonus Certificate — guaranteed minimum, with a catch

Out of all the certificates the structured-product industry sells, the Bonus is the one that confuses corporate-finance people the most. It looks like free money: "guaranteed minimum payoff if things don't go too badly, plusunlimited upside on top".

Free money doesn't exist. Here's what's hidden.

The promise

You buy a Bonus Certificate today on, say, the Eurostoxx 50, with these features:

• Bonus level:110% of today's spot. If the index ends at or above 110% at maturity, you get 110% — even if the path was bumpy.
• Barrier: 70% of today's spot. As long as the index never touches 70% during the life of the certificate, the bonus is yours.
• Maturity: 3 years.

What this means in plain English:

• Index ends above 110% → you track the upside, no cap.
• Index ends between 70% and 110%, never touched 70%? → you still collect 110%. That's the bonus.
• Index ever touches 70% during the 3 years → bonus disappears. You hold what is now a regular tracker — your final payoff is whatever the index ends at, with full downside.

The catch

That barrier is doing all the heavy lifting for the issuer. In good times — index drifts mildly bullish, low volatility — the barrier never gets hit, you collect the bonus, you're delighted. The issuer earns a small spread.

In bad times — sudden crash, vol spikes — the index touches 70%, the barrier knocks out, your "guaranteed minimum 110%" evaporates, and you ride the index down with full exposure. The very moment you wanted the protection, you don't have it anymore.

This is what you implicitly soldto fund the bonus: the right to your bonus disappearing exactly when markets get scary. You're short tail risk in exchange for upside enhancement in normal times.

When does it actually work?

When you genuinely believe the index will mildly outperform with low volatility, and the barrier is far enough from current levels to make a knock-out very unlikely. In that environment, you out-earn a vanilla long-only position by the bonus delta.

But notice you've expressed a precise view — mildly bullish + low vol + no crash— not a generic "I want some equity exposure". Most retail buyers don't realize they've taken that view; they think they bought protection.

How to read a Bonus Certificate term sheet

The four numbers that matter:

1. Bonus level / spot ratio — how much extra return are you promised? Higher = better, but only conditional on no knock-out.
2. Barrier / spot ratio — how far does the underlying need to drop to nuke the bonus? Closer to 100% = much riskier than it sounds.
3. Maturity — longer = more time for the barrier to be hit.
4. Underlying volatility — high vol on the underlying = much higher knock-out probability than headline numbers suggest.

A 110% bonus on a 70% barrier sounds like a lot of cushion. But if vol is 30% and maturity is 3 years, the probability of touching 70% is much higher than people intuit — easily over 30%. Always run the numbers before buying.