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Journal of Indexes

Goldman Sachs Links Debt To Internet Index

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Goldman Sachs Group has joined rivals Salomon Smith Barney and Lehman Brothers in offering debt securities linked to the performance of an Internet index. The $11.4 million debut offering in late 1999 allowed buyers, primarily retail "Mom and Pop" investors, to play high-flying Internet equities without actually buying any Internet stocks, while protecting most of their principal investment if the high-fliers should crash.

Goldman's zero coupon notes due 2003 are listed on the Chicago Board Options Exchange (CBOE) and linked to the GSTI Internet Index, also known as the GIN Index, which is sponsored by Goldman and calculated by the CBOE. The final payout is tied to how well the highly volatile GIN Index performs -or underperforms - over the course of the four years.

The issue includes two years of call protection. After two years, the securities are callable at a premium of 160% of the face value of the note, and after three years, at 190%. The hypothetical pretax total rate of return can be upwards of 80% if the index breaks 1,000.

Investing in the index -linked notes could mean some big rewards if the 18 companies that comprise the index -such as Amazon.com, Inc, America Online Inc, Inktomi Communications and Yahoo! Inc. - continue to boom.

But any losses to the investor are capped at 10% - likely a lot less than it would cost an investor to buy the individual stocks and hold in a bear market.

However, the notes may be hard to get rid of, if need be. "There may be little or no secondary market for your note," Goldman warned in the prospectus.

Salomon launched the first of such securities in 1998, and Lehman followed suit shortly afterwards. "The notes were sold across our client base and a lot of people were interested," said one Lehman official.

 

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