Bank of Montreal Launches $28.4 Million Capped Leveraged Notes Linked to Russell 2000 Index Maturing August 2027

Structured Product Terms and Index Linkage

The newly issued notes by Bank of Montreal link directly to the Russell 2000 Index performance, measured from the trade date of July 23, 2026, through the determination date of August 23, 2027. The initial underlier level was fixed at 2,940.163, reflecting the Russell 2000 Index closing level on the trade date. This one-year structured product offers investors leveraged, capped exposure to small-cap equity market returns.

These notes do not pay periodic interest; returns are solely based on the appreciation or depreciation of the underlying index. Investors must hold the notes to maturity as they are not exchange-listed and are designed for buy-and-hold strategies. BMO Capital Markets Corp. acts as the calculation agent, responsible for determining final payoffs based on the Russell 2000 Index closing level on August 23, 2027.

Upside Participation and Maximum Return Cap

The notes feature a 150% upside participation rate, amplifying positive Russell 2000 Index returns by 50% for investors. If the index rises above the initial level of 2,940.163, investors receive $1,000 principal plus $1,000 multiplied by 150% and the index's percentage gain, subject to a maximum settlement amount. This structure enhances exposure to favorable market conditions.

However, the upside is capped at $1,267.75 per $1,000 principal, corresponding to a cap level of 3,464.9820955 on the Russell 2000 Index—117.85% above the initial level. This cap limits maximum gains, preventing investors from fully benefiting from index rallies exceeding approximately 17.85%. Thus, profit potential is restricted even if the index appreciates substantially during the holding period.

Downside Risk and Principal Loss Exposure

Investors face full downside risk with no capital protection. If the final index level on August 23, 2027, is at or below 2,940.163, investors lose 1% of principal for every 1% decline in the index. The notes explicitly state the possibility of losing some or all principal. Unlike traditional bonds, these structured notes have no loss floor and do not guarantee recovery if the index falls.

The cash settlement formula highlights the asymmetric risk: a 1% index decline results in $990 per $1,000 principal (a 1% loss), with losses compounding as the index drops further. A 50% index decline could lead to total principal loss. This risk profile makes the notes unsuitable for investors seeking capital preservation or conventional fixed-income features.

Valuation and Initial Pricing

Bank of Montreal priced the notes at $1,000 per $1,000 principal with an underwriting discount of $13.60 per note, yielding net proceeds of $986.40 per note. The offering raised $28.4 million gross, with $386,280.80 retained as underwriting fees, resulting in approximately $28.02 million net proceeds to the issuer. Alternative pricing methods or benchmarks were not disclosed.

The estimated initial value as of the trade date was $985.37 per $1,000 principal, below the issue price by about $14.63 per note, reflecting the embedded options' theoretical cost. The filing notes that actual note value varies with multiple factors and cannot be precisely predicted, limiting reliance on any single valuation.

Issuer Credit Risk and Unsecured Nature

Payments depend on Bank of Montreal's creditworthiness, as the notes are unsecured obligations. A default by the issuer could result in partial or total loss of investment. The notes are not insured by FDIC, Canada Deposit Insurance Corporation, or any other agency, exposing investors solely to issuer credit risk.

These notes are not bail-inable and cannot convert into Bank of Montreal common shares or affiliates’ shares under the Canada Deposit Insurance Corporation Act. Consequently, investors lack equity participation or conversion options to offset credit risk. Assessing Bank of Montreal’s financial health is critical, as default would eliminate principal and accrued returns recovery.

Tax Implications and Regulatory Compliance

The notes carry significant U.S. federal income tax consequences, detailed in the product supplement and prospectus dated March 25, 2025, incorporated by reference. Investors should consult these documents for comprehensive tax treatment, including ordinary income characterization and gain or loss treatment upon disposition.

Canadian federal income tax considerations also apply, with analysis provided in the product supplement. Investors must consider interactions between U.S. and Canadian tax laws where relevant. In case of conflicting disclosures, the pricing supplement’s terms prevail, establishing document hierarchy for interpretation.

Market Disruption and Maturity Date Adjustments

The determination date of August 23, 2027, may be postponed due to non-scheduled trading days or market disruption events affecting the Russell 2000 Index. The maturity date of August 25, 2027, will likewise be adjusted accordingly. Detailed provisions on market disruption events and postponement mechanics are outlined in the product supplement.

These provisions protect investors by ensuring index levels are determined under normal trading conditions, avoiding distorted settlement calculations. The filing does not specify maximum postponement duration or indefinite extensions. Investors should review product supplement details to understand timing risks and potential impacts on returns.

Investment Suitability and Risk Overview

These notes are complex structured products combining leverage, capped upside, and full downside risk, differing significantly from traditional debt or equity. The 150% upside participation with full principal loss exposure creates an asymmetric risk-return profile, appropriate only for sophisticated investors familiar with derivatives and index-linked products. Designed for buy-and-hold investors expecting moderate Russell 2000 appreciation and willing to accept total principal loss if the index declines.

The capped maximum return and uncapped downside distinguish these notes from conventional fixed-income securities. Investors should weigh the capped upside’s opportunity cost against downside risks. The filing highlights risks absent in traditional debt, with detailed analysis in the product and prospectus supplements effective March 25, 2025.

Distribution and Secondary Market Details

BMO Capital Markets Corp., a Bank of Montreal subsidiary, acts as distribution agent, earning a $13.60 underwriting discount per note. The notes are not exchange-listed and intended to be held to maturity, resulting in illiquidity and no active secondary market. Investors cannot easily exit before maturity and must commit capital for the full one-year term.

The absence of exchange listing and secondary trading differentiates these notes from publicly traded structured products, complicating early exit strategies. Principal denominations are $1,000 and multiples thereof, with CUSIP 06376LP42 and ISIN US06376LP425 for identification. Investors should confirm these identifiers before purchase to avoid confusion with other Bank of Montreal offerings.