A discount certificate (belonging to the broad category of yield enhancement products) that allows the holder to invest indirectly in an underlying security/ instrument, for a price  lower than an outright transaction (hence the “discount”). In other words, the price of the certificate will always be lower than that of the underlying security (e.g., a stock) or the collective level of an underlying index.

Discount certificates grant the holder the right to receive a specific stock or stock index (through physical or cash settlement), accompanies with a limited degree of capital protection if the underlying trades downside. Consequently, the risk of loss associated with such an investment is less than what would otherwise be in a direct investment in the underlying.

Similar to barrier reverse convertibles, a barrier discount certificate is embedded with a knock-in (KI) mechanism. If the predefined threshold (strike) is not breached during the certificate’s term to maturity, the holder will receive payment of a predetermined amount (cap), at expiration, irrespective of the price level at expiration.

The cap placed an upper limit on profits. At maturity, the maximum amount the holder would get depends on whether the barrier has never been touched or undercut during the term to maturity. But if the knock-in is touched, the certificate automatically converts into a vanilla discount certificate.

However, if the barrier is breached, at any point in time, and the underlying instrument starts to trade below the strike price level, at maturity the holder would  receive either the corresponding number of underlying instruments or the cash value of the underlying index prevailing at the close of trading on the expiration date.

Barrier discount certificates may be instrumental for investors who expecting the underlying instrument to trade sideways or slightly higher during the certificate’s term to maturity.