What is a Targeted Accrual Redemption Note - TARN
A targeted accrual redemption note is an exotic derivative that terminates when a limit on coupon payments to the holder is reached.
BREAKING DOWN Targeted Accrual Redemption Note - TARN
Target accrual redemption notes (TARN) have the distinguishing feature of being subject to early termination. If the accumulation of coupons reaches a predetermined amount before the settlement date, the holder of the note receives a final payment of the par value and the contract ends.
Aside from these features, TARNs are similar to inverse floating rate notes; the benchmark may be LIBOR, Euribor, or a similar rate. TARNs can also be conceptualized as path-dependent options: the end-user in effect buys a strip of call options while selling a strip of put options with a notional value that is double the calls'. The contract may include a knock-out provision that terminates it if the benchmark reaches a certain level.
TARNs offer end-users a greater chance of making a profit, meaning that the seller is likely to lose money. In exchange, however, the end-user takes the risk that their downside will be greater if the trade does not turn out as expected; at the same time, their maximum gains may be capped.
Foreign exchange TARNs or FX-TARNs are a common form of TARN in which counterparties exchange currencies at a pre-determined rate on pre-determined dates. The amount of currency exchanged varies depending on whether the rate is above or below a set forward price.