It stands for target redemption note; an index linked note that terminates whenever a maturity is reached or the total amount paid on the structured coupon leg exceeds a preset threshold. Target redemption notes (TARNs) can be viewed as path-dependent options which give the holder the right to redeem a note immediately at par when the aggregate amount of coupons paid reaches a specified target. The target redemption note is very similar to the inverse floating rate note, but with additional features like the possibility of early termination and a guaranteed amount of coupon payments.
For example, a 5-year TARN in which the first coupon rate is fixed at 8%, whilst the coupon rates in subsequent years are calculated based on this formula: MAX(7.54%- 2L, 0), where L denotes the index rate (say the 12-month benchmark rate) on the coupon date. The TARN will be terminated prematurely if the accumulated coupon rate, on the coupon date, reaches the target cap of 13%.
