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This Chapter 1 reviews the process of structuring an equity-linked, principal protected note via the purchase of a fixed-rate bond and a call option. We begin by assuming that an investor has given you $100, and has asked you to provide her with a vehicle for investing in Microsoft shares for a 3-year time horizon. Recognizing however that Microsoft shares are volatile and could expose much of her investment to a loss, the investor also asks that your bank guarantee the return of her principal in 3 years time. Finally, the investor specifies that she would like to receive a coupon, paid annually, equal to 1% of her principal. You can probably recognize right away that to provide the guaranteed coupon of 1%, and the principal at maturity, you will need to invest a large portion of the investors money in some sort of fixed-income security. You therefore call up your funding desk and ask them how much it would cost to purchase a 3-year bullet bond, with a 1% coupon, bearing the credit