Targeted Accrual Redemption Note - TARN

Darn...your TARN was terminated! But hey, that’s how they’re designed.

TARNs are Targeted Accrual Redemption Notes: a type of exotic (i.e. uncommon and fancy) derivative that terminates when coupon payments to the holder reach a predetermined threshold before the settlement date. Upon termination, the TARN holder gets the final payment, which is the par value...then the contract is over.

TARNs are good for savvy derivatives traders who like the idea of coupon payments following a pretty fast par value payout. They’re also all right options for forex investors. Yep, there’s FX TARNs for currency exchange.

Like most exotic derivatives, TARNs aren’t for everyone, because they come with their fair share of risk. If the TARN’s underlying security performs poorly, TARN holders can’t tap out. You’ll be stuck with an eroding short-term investment...eh. Not ideal.

And it’s hard to tell if this would happen, since it depends on the volatility of the underlying security. Don’t TARNish your short-term investments with TARNs...unless you’re willing to deal with the risk involved.