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Targeted Accrual Redemption Note (TARN)

Updated on May 9, 2021 , 63 views

Targeted accrual Redemption note refers to index-linked note which has a set amount of coupons representing the target cap. Once the target cap has reached its limit, then a note will be cancelled.

The cap is the maximum amount of accumulated coupon payments received. If the coupon accumulation has reached its limit before time, the note holder will receive the final payment of the par value and then the contract will end.


TARN is similar to Inverse Floating Rate Notes. The benchmark could be LIBOR, Euribor or a similar rate. It can also be conceptualised as path-dependent options.

FX-TARNs or foreign exchange TARNs are common and refer to counterparties exchange currencies at a pre-approved date and rate. The currency amount varies based on the rate above or below a set forward price.

Valuation of TARNs

Target accrual redemption notes' valuation can be a bit challenging since redemption timelines are usually dependent on coupons received till date.

Once the target knockout level is reached, it means the Investment has concluded and the principal amount is repaid. From the perspective of an investor, an initial coupon rate for a time and return of Capital is usually an ideal outcome. However, note that depending on how the index traits performed an investor may find being stuck in investment and also see the time value of money deteriorate.

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Remember that the value of a note is the current value of the Par and coupon payment. The uncertainty with target and accrual redemption notes will always exist since it is possible that all coupon payments will not be received.

Therefore, targeted accrual redemption notes need a simulation of interest rates volatility to calculate the probability to understand the exact knockout level. This method would be used instead of linear calculation on present value.

TARNs intertwined with volatile benchmarks will be difficult to calculate accurately.

All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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