PlayInfoBox

Home /Investing /Structured Notes Explained: Step-Down, Autocall, and Knock-In Basics

Structured Notes Explained: Step-Down, Autocall, and Knock-In Basics

Your broker mentioned "autocall" and "knock-in" when you bought this note -- here is what those terms actually mean.

What an equity-linked structured note is

A structured note whose return is tied to how a stock index or individual stock moves. The issuer sets the maturity, redemption conditions, and target return in advance; if the underlying asset meets those conditions, the promised return is paid, and if it does not, a loss can result.

Notes linked to something other than stocks

Some structured notes reference interest rates, commodities, currencies, or credit instead of a stock or stock index. The basic mechanics -- conditional payout based on preset terms -- are the same; what differs is the underlying asset the note is linked to, so checking exactly what a note references is the first step.

The step-down autocall structure

The most common design: on periodic observation dates, if the underlying closes at or above a set percentage of its starting price, the note automatically redeems early with the promised return. If it does not, the note carries over to the next observation date, and because the required percentage is typically lowered a little at each successive date, this design is called "step-down."

What a knock-in barrier means

If the underlying asset’s price ever falls below the knock-in barrier set in the contract -- even once, at any point -- the terms for repayment at maturity change unfavorably. Before a knock-in occurs, principal can still be returned in full even if the price has dropped somewhat by maturity, but once a knock-in has happened and the price has not recovered by maturity, a loss proportional to the decline can result.

Principal-at-risk vs. principal-protected notes

A note with a knock-in structure is typically principal-at-risk: failing to meet the conditions results in a loss. A principal-protected note is designed with a lower expected return in exchange for limiting or eliminating the loss-possible range. Always confirm in the note’s name and offering documents whether it is principal-protected or not.

What to watch for before investing

When a note is linked to two or more underlying assets, redemption is often decided based on whichever one performs worst, so all of the referenced assets need to do well, not just most of them. It is also important to confirm that early cash-out can result in a loss of principal and that these notes are not covered by deposit insurance.

If other derivative-linked securities interest you

This site also has a separate guide covering convertible bonds and bonds with warrants, which combine a bond with an embedded option in a different way than an equity-linked note does. It is worth reading alongside this one if you want to compare how the two structures build in downside protection and upside differently.

This is general information, not investment advice

This page explains the general structure of equity- and derivative-linked structured notes for informational purposes and is not advice to buy or sell any specific product. Exact redemption conditions, knock-in barrier levels, and the underlying assets used all vary by note, so always confirm the details in the official offering document before investing.

Frequently Asked Questions

Does hitting the knock-in barrier automatically mean I lose money?

No -- a knock-in only means the price entered a range where a loss becomes possible; it does not by itself lock in a loss. If the underlying asset’s price recovers by maturity even after a knock-in has occurred, the note can still be redeemed without a loss of principal. A loss only results if the price has not recovered by maturity.

Can I cash out before maturity?

Early redemption is possible for most notes, but you receive the value as assessed at that time minus fees, which is often less than your original principal. These notes are generally designed to be held to maturity, so it helps to go in understanding that early cash-out usually comes at a cost.