An instrument that allows investors to participate in the return of a specific underlying asset. Participation is often up to a certain limit, applied to the rate of return. It gives investors indirect exposure to a particular index or asset price.

For example, a participation instrument might take the form of a floating rate bond whose coupon rate adjusts periodically according to a pre-determined formula – e.g., a reference rate plus a certain spread.

In numbers, a 15-year floater may carry a coupon rate equivalent to 80% of the 10-year constant maturity swap (CMS) rate. The instrument holders can link its returns to the performance of the 10-year constant maturity swap rate.

Participation instruments belong to a broader category known as structured financial instrument– a wide range of instruments designed to provide a sophisticated risk-return profile, by repackaging different aspects or elements such as risk, correlation with underlying assets/ rates, etc.