DEFINITION of 'Market Index Target-Term Security - MITTS'

A type of principal-protected note initially engineered by Merrill Lynch that is designed to limit the amount of downside risk an investor is exposed to while also providing a return that is proportional to that of a specified stock market index. Market Index Target-Term Securities (MITTS) typically do not afford their owner the right to redeem the security before maturity, nor do they usually afford the right to call the issue in early.

BREAKING DOWN 'Market Index Target-Term Security - MITTS'

The purpose of this type of security is to provide equity exposure to an investor's portfolio while still providing a guarantee to the investor that, even if the stock market performs poorly during their investment horizon, they will still be left with a specified minimum amount of capital.

For example, assume an investor could purchase MITTS units today at a price of $10 per unit. The MITTS mature in exactly one year, at which time they require the return of the $10 principal value to investors, plus a proportional return based on the performance of the S&P 500 during that time period. So, if the S&P 500 crashes during the year, the investor still receives their $10 per unit back. However, if the S&P 500 does well during the year, the investor will receive their $10 per unit back, plus an extra amount per unit that is calculated based on the S&P 500's return during the year.

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