Terms

Market Index Target-Term Securities MITTS

Market Index Target-Term Securities (MITTS)

Alexandra Twin has 15+ years of experience as an editor and writer, covering financial news for public and private companies.

What Are Market Index Target-Term Securities (MITTS)?

The market index target-term security is a principal-protected note designed to provide equity exposure while protecting the initial investment. It was engineered by Merrill Lynch and designed to limit downside risk and provide a return proportional to a specified stock market index. Market index target-term securities typically do not allow for redemption before maturity, nor do they allow for early call.

Key Takeaways

– Market index target-term securities (MITTS), or equity-linked notes, are bonds connected to an index or series of stocks.

– These securities were initially created by Merrill Lynch for investors seeking exposure to equities with the protection of their initial investment.

– Despite a tanking stock or index, the investor retains a minimum amount of capital.

– MITTS offer some security for risk-averse investors, but they are still taxed regardless of index performance.

– Holders of MITTS cannot sell them before the maturity date.

Understanding Market Index Target-Term Securities (MITTS)

Market index target-term securities provide equity exposure while guaranteeing a specified minimum amount of capital, even if the stock market performs poorly. Although they invest in equity markets, they are considered debt instruments.

MITTS Examples

To illustrate, assume an investor can purchase market index target-term security units for $10 per unit. The securities mature in one year, at which time the investor receives the $10 principal value plus a proportional return based on the performance of the selected index, such as the S&P 500.

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If the S&P 500 crashes, the investor still receives the $10 per unit. If the S&P 500 performs well, the investor receives $10 per unit plus an extra amount calculated based on the S&P 500’s return. The issuer of the security typically claims a percentage of any earnings, along with standard fees.

In a 2019 offering from Bank of America, market index target-term securities were priced at $10 per unit, linked to the S&P 500, with a maturity of approximately six years. The securities had a maximum return of 50% to 70% at maturity. If the S&P 500 was flat or declined, the holder was still guaranteed the principal amount.

Drawbacks of MITTS

Despite loss constraints and a reasonable lifespan to maturity, market index target-term securities have several disadvantages. They are taxed regardless of index gains or losses. Holders cannot sell them before maturity. Investors who purchase these securities trade potential upside for downside protection. While the principal is protected, the investor only realizes a portion of potential gains.

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