Fixed coupon notes explained: Good Investment?

Getting fixed coupon notes explained properly is the first step for any affluent Singaporean investor eyeing attractive double-digit yields in today’s shifting interest rate environment. If you are a priority or private banking client, you have likely seen term sheets offering 8% to over 20% annual coupons linked to tech giants like Nvidia or reliable local banks like DBS. But are these products a savvy income strategy or a potential trap for your capital?

This guide breaks down the mechanics, risks, and rewards of Fixed Coupon Notes (FCNs), helping you decide if they fit your portfolio.

Fixed coupon notes explained: How do they work?

To truly have fixed coupon notes explained, we must look under the hood. An FCN is a structured product that essentially combines a bond with a derivative. “In simple terms, you are selling a ‘Put Option’ to the bank. You act as the “insurer” for the bank. You lend your principal to the issuer and agree to “insure” a basket of stocks against a significant price drop. In exchange for taking on this downside risk, the bank pays you a high, regular coupon.

Unlike a standard fixed deposit where your return is risk-free—and currently hovering around 1.15% to 1.40% as of late 2025—an FCN’s return depends on the performance of a specific basket of stocks (usually 2 to 4). As long as these stocks do not crash below a certain safety level, known as the Barrier, you collect your coupons and eventually get your principal back.

The mechanics of fixed coupon notes explained: Key Terms

To navigate a term sheet successfully, you must understand four critical concepts:

1. Strike Price: This is the price at which you agree to buy the stock if the market crashes. It is typically set at 85% to 95% of the initial stock price.
2. Knock-In (KI) Barrier: This is your safety line, usually set at 60% to 70% of the initial price. As long as the worst-performing stock in your basket never falls below this price, your principal is generally safe.
3. Knock-Out (KO) / Autocall: If the stocks rise above a certain level (e.g., 100% of the initial price) on a specific observation date, the note ends early. You get your principal back plus the accrued coupon, and the deal closes.
4. Worst-of vs. Equal Weight Basket: As shown in the chart above, an FCN often tracks an Equal Weight Basket of stocks—for example, a split between DBS, Tesla, and Nvidia. While the basket contains equal amounts of these stocks, the risk calculation is not averaged out.
   • our repayment depends solely on the worst-performing stock in that basket.
   • Even if your “Equal Weight” basket has two winners (e.g., DBS and Nvidia rally), if Tesla crashes below the barrier, your payout is determined entirely by Tesla’s poor performance. The strong performance of the others does not “save” you.

Benefits of fixed coupon notes explained: Why the Hype?

Why are wealthy investors flocking to these instruments? The answer lies in the massive “yield gap.”

• Beating Inflation: With 6-month T-bill yields dipping to around 1.41% recently, traditional safe havens are offering lower returns. FCNs, however, can target 8% to 12% p.a. on blue-chip stocks, or even higher on volatile tech names.

• Profiting in Sideways Markets: You do not need the market to rally to make money. Even if the stocks stay flat or drop slightly (but stay above the barrier), you still earn your full coupon. Consequently, this makes FCNs a popular strategy when markets lack clear direction.

Risks of fixed coupon notes explained: The Hidden Dangers

However, high returns always come with high risks. It is vital to have the downsides of fixed coupon notes explained clearly before committing capital.

The “Ghost of Lehman Brothers” still haunts the structured product space in Singapore. The 2008 Minibond saga taught investors that these are not simple deposits.

• Principal is NOT Guaranteed: If the worst-performing stock crashes below the Knock-In Barrier and stays below the Strike Price at maturity, you will not get your cash back. Instead, you will receive physical shares of that losing stock at the Strike Price.
• Liquidity Risk: FCNs are generally “buy-and-hold” products. Unlike stocks listed on the SGX, there is no active secondary market. If you need to sell early, the bank is the only buyer. Bid-ask spreads can be wide (often 5% or more), meaning you will likely sell at a significant loss.

Eligibility for fixed coupon notes explained: Are You an Accredited Investor?

In Singapore, FCNs are typically reserved for Accredited Investors (AIs). The Monetary Authority of Singapore (MAS) has strict criteria for who qualifies. As of 2024/2025, to qualify as an individual AI, you generally need to meet one of the following criteria:

• Income: Annual income of at least SGD 300,000 in the last 12 months.
• Net Personal Assets: Over SGD 2 million (Note: Crypto holdings are now subject to a 50% haircut and capped at S$200k. Your primary residence can only contribute up to SGD 1 million).
• Net Financial Assets: Exceeding SGD 1 million (e.g., cash, stocks, bonds).

Crucially, you must explicitly “Opt-In” to be treated as an AI. By doing so, you acknowledge that you are sophisticated enough to understand the risks without the standard regulatory protections afforded to retail investors.

Payoff scenarios for fixed coupon notes explained

Let’s visualise a hypothetical 6-month FCN on a basket of Singapore banks with a 95% Strike and 65% Knock-In Barrier.

• Scenario A (Bull Market): The stocks rise by 5% (to 105). The note “Knocks Out” in month 1. You get your principal + 1 month coupon. You made a quick profit but now face reinvestment risk.
• Scenario B (Sideways Market): The stocks fluctuate but never touch the 65% Barrier. You collect the high coupon every month for 6 months and get your full principal back in cash at maturity.
• Scenario C (Market Crash): As shown in the chart, the stock price (purple line) crosses the 65% Red Barrier line (triggering the Knock-In). It continues to slide and ends the tenure at 60%. Since the closing price is below the Strike, you receive shares valued at this lower price, resulting in a capital loss.

Conclusion

Fixed Coupon Notes are powerful tools for income generation, but they are not for everyone. They work best for investors who have a neutral to moderately bullish view and are willing to own the underlying stocks if things go wrong. If you are strictly looking for capital preservation, Singapore Savings Bonds (SSB) or T-bills are safer bets.

Before signing that term sheet, ensure you understand the “Worst-of” risk and are comfortable with the specific stocks in the basket.

FCNs are powerful tools, but they require precise execution.

Ready to Explore?

If you are unsure whether an FCN fits your risk profile, contact us today for a zero-cost, no-obligation comparison of the latest structured products to verify product suitability and current rates.