Australian Stock Price Riskless Indexed Note (ASPIRIN)

What Is an Australian Stock Price Riskless Indexed Note (ASPIRIN)?

An Australian stock price riskless indexed note (ASPIRIN) is a zero-coupon bond with a return that is linked to the Australian All-Ordinaries Stock Index.

The bond has a four-year maturity and is repayable at face value, with a yield derived from the index's percentage increase over a predetermined level. The bond is also known as an All-Ordinaries Share Price Riskless Indexed Note.

Understanding ASPIRIN

Australian stock price riskless indexed note (ASPIRIN) is an alternative investment opportunity for those investors who wish to capture gains in the stock market, while also hoping to mitigate the downside risk of equity investing. ASPIRINs are indexed to the Australian All-Ordinaries Stock Index (XAO), which is comprised of common shares from the Australian Stock Exchange (ASX). The All-Ordinaries Index is the most quoted benchmark for Australian equities. The ASX is responsible for calculating and distributing the XAO index and its returns.

An ASPIRIN note will pay investors a return when the All-Ordinaries Index performs above a specific percentage level. For example, suppose the note’s pre-determined percentage increase, also known as a hurdle rate, was 10%. If the All-Ordinaries Index gained 15% during the note’s four-year lifespan, the ASPIRIN holder would receive a yield of 5%.

But what happens if the Index fails to earn more than 10% during that time frame? Or what if the index has a negative return? The downside of the note occurs if the index does not outperform its hurdle rate, or percentage level, for the overall four-year period.

In this event, investors would receive a zero percent return on the note. However, because the note is repayable at face value, investors would still receive their original principal in full. This feature reflects the “riskless” aspect of the security.

ASPIRINs and Zero-Coupon Bonds

An ASPIRIN is a zero-coupon bond, which is defined as a debt security that doesn't pay interest but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. So an ASPIRIN is a zero-coupon bond with an equity return kicker, meaning an investor receives the excess return of the Australian All-Ordinaries Stock Index if its gain is over and above the predefined hurdle rate.

However, ASPIRINs differ from zero-coupon bonds that offer a fixed rate of interest, such as U.S. savings bonds. When a savings bond matures, it’s often worth twice as much as its initial investment. But that’s no guarantee with an ASPIRIN because it does not earn interest; it only makes a profit if the index to which it is linked exceeds its hurdle rate. And while the face value of the note is paid in full, it may be worth less upon maturity than at issuance due to the effects of inflation.