A structured note in which the coupon payment is defined by a tunnel where the underlying rate fluctuates, out of which no coupon payment would accrue. The “tunnel” may take two forms: an expanding tunnel (the range of fluctuation widens over time) and a contracting/ shirking tunnel (the range narrows down over time).

As a structure product, a tunnel note is designed to meet specific issuer/ investor needs. For investors, a tunnel note allows a range of potential payoffs, where a rate is guaranteed within range defined by a cap and floor, while investors to profit from any favorable development in the rate up to a set limit.