S&P Funding Agreement Backed Notes: An Overview
S&P Funding Agreement Backed Notes (FABNs) are a type of structured note that provide investors with exposure to the creditworthiness of an insurance company or bank. These notes are issued by the insurance company or bank and are typically backed by a funding agreement.
Funding agreements are contracts between an insurance company or bank and an investor. These agreements guarantee a fixed rate of return on the investment for a specified period of time. Funding agreements are considered low-risk investments because the insurance company or bank assumes the risk of the investment.
FABNs are structured notes because they combine a debt instrument with a derivative. The debt instrument is the funding agreement, which provides the fixed rate of return, while the derivative provides exposure to the creditworthiness of the insurance company or bank.
FABNs are popular with investors who are looking for a low-risk investment with a higher yield than traditional fixed-income investments. The notes are typically issued with maturities ranging from one to ten years.
One of the advantages of FABNs is that they are tax-advantaged investments. The interest earned on the notes is typically tax-exempt at the federal level and may also be exempt from state and local taxes.
Another advantage of FABNs is that they are usually rated by credit rating agencies, such as Standard & Poor’s. These ratings provide investors with an indication of the creditworthiness of the insurance company or bank that backs the notes.
However, FABNs are not without risk. Investors should carefully read the offering documents before investing in these notes. The documents will provide information about the creditworthiness of the insurance company or bank that backs the notes, as well as the terms and conditions of the funding agreement.
Investors should also be aware that FABNs are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. This means that if the insurance company or bank that backs the notes defaults on its obligations, investors could lose some or all of their investment.
In conclusion, S&P Funding Agreement Backed Notes are a type of structured note that provide investors with exposure to the creditworthiness of an insurance company or bank. These notes are considered low-risk investments and are typically issued with maturities ranging from one to ten years. However, FABNs are not without risk, and investors should carefully read the offering documents before investing in these notes.