A structured note that guarantees capital (hence the name: capital protection note). This note (which is also known as a principal protected note) secures a future payment of the greater of two values: 1) the initial investment (principal amount invested) or 2) participation in the underlying market.  The holder can get a complete downside protection and an extent of upside participation in an index or in a particular stock (the underlying) over a specified period (the note’s term: usually 3-10 years). The performance of the note is typically stable, but will still be impacted by inflation observed over its term.  Everything else held constant, the note would not be affected by the way the market performs. However, the holder can participate in any upside potential if the market performs well. Underlying investments can include stock market indexes, mutual funds or hedge funds, etc.

Additionally, this note is associated with an exposure to credit risk (and hence it is also used as a means to transfer credit risk).

By virtue of its features, a principal protected note can also be classified as a form of credit derivative.

This note is also known as a return note or for short as a PPN.