It stands for target redemption note. A structure that terminates whenever a maturity is reached or the total amount paid on the structured coupon leg exceeds a preset threshold. 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 (e.g., the 12-month Euribor) 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%.
