Morningstar - Q3 2020 - 40

Strategies

EXHIBIT 1

Payout Possibilities We ran 10,000 simulations of the performance of a Goldman Sachs structured note. The results were mixed.
Number of Results
5,000

The note returned full payment of its 10
coupons and its principal to investors in less
than half of the scenarios.

4,000

3,000

2,000

In most of our scenarios, the return was
less than full payment. A sizable amount of
results showed losses of 25% or more.

1,000
0

$360 400 440 480
Total Value of Payments

520

560

600

640

680

720

760

800

840

880

920

960 1,000 1,040 1,080 1,120 1,160 1,200 1,240

Note: Monte Carlo simulation assumes the note is not called before maturity and all coupons are paid during the life of the note.
Source: SEC filings and author calculations.

Yield-Enhanced
Notes
Return
Stock/Bondvalue"
Portfolio
andReturn
is based on each index's initial value
Structured
notes can
be set
up in myriad60/40
ways.
on the issuance date. If any of the daily index 30%
Issuers basically mix and match the key product
values drop below the coupon threshold at any
attributes to meet investor demand, leading
to literally hundreds of potential different
point during the quarter, investors receive no 20
18.62
structures. Structured notes are18.25
also issued in
coupon payment
for that period.
relatively small dollar amounts, with many
11.65 of
11.29 also specifies that
10.60
as11.21
small as $25,000. On any given day, dozens
The filing
Goldman Sachs has 10
new
up on the1.62
the right
the notes before maturity
6.08these notes show5.28
2.03to call1.80
1.05 on
5.22filings for
4.40
SEC's website.
any coupon payment date. If the notes are called
0
-5.38
-3.09 early, investors receive their par value of $1,000
-9.72
plus the coupon for the current quarter.
-9.75 Because
For example,
the filing for the contingent
income callable notes issued by Goldman Sachs
the issuer can call the notes at its discretion, -10
(CUSIP 40056YAF1) describes the following key
investors have no way of knowing how long their
characteristics: The note has a par value of
coupon payments will last or when they might
-20.10
-20
$1,000, a maturity of about two and a half years,
receive their principal back.
-23.70
and is linked to three indexes, the S&P 500,
-30
Russell 20002007
, and Euro2008
Stoxx 502009
. It promises
to
for investors
2006
2010
2011 It's also
2012difficult2013
2014 to estimate
2015 how
pay a hefty $22.75 per quarter, which translates
much they might receive if the notes aren't called
into an annualized yield of 9.1%, if daily prices
before maturity. The payoff is tied to the worstfor the underlying indexes stay above 75% of
performing of the S&P 500, Russell 2000, and Euro
their original values for the whole quarter. The
Stoxx 50 indexes1 and has a downside threshold
75% level is defined as the "coupon threshold
of 70% of the initial value. At maturity, if all three

indexes are above 70% of their initial value,
the investor gets back the par value of $1,000; if
even one of the indexes falls below 70% at
maturity, the final payment gets scaled down by
the performance of that worst-performing
index. So, if the Russell 2000 drops to 65% of
its initial value, for example, the investor's final
payout will drop to $650 regardless of what
the other indexes did. It's also worth noting
that there is no upside potential in the notes;
regardless of how well the three indexes perform
during the life of the note, the maximum
return to investors is an annualized coupon
payment of 9.1%.
Complexity
As this example suggests, the complex design of
structured notes makes it tough for investors
to understand exactly what they're getting. One
way to get a more accurate sense of potential
returns is to run a Monte Carlo analysis, which
is a mathematical technique that generates

1 Note that these are price indexes; this is one of the common tricks to lull investors into anticipating higher returns from the underlying assets. A significant portion of most equity-index returns
comes from dividends.

Morningstar Q3 2020

Morningstar - Q3 2020

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