Nordea kraftobligasjon index bond : value and expected return estimated by a retail investor

Abstract

Index Bonds are a particular form of a structured investment product that consists of a bond element and a return element. The bond element is based on the guaranteed amount repaid to the investor at maturity. The return element is typically a bundle of options on an index or financial asset, scaled by a participation factor. Nordea Kraftobligasjon was the first Norwegian index bond with electricity forward contracts as underlying. This thesis demonstrates the analysis that an investor should perform to be able to make an independent and prudent decision on whether or not to invest in Nordea Kraftobligasjon XV. The results indicate that an investor could pay as much as 3,5% to 4,5% in commission fee in addition to up to 3% in subscription fee. The expected return on the investment is estimated at approx. 3,5% p.a., compared with the risk-free rate of 4,5% p.a. The thesis illustrates what methodological and practical challenges an investor can meet analysing an index bond on electricity contracts.