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Here is my idea about structuring TARN(linked to a basket of stocks), Assume the 7yr TARN, linked to the worst of 6 stocks, Target rate is 14%, the fixed coupon of first period is 7%, we can decompose TARN into the following component,1)7yr zero coupon, redemption at 1002)a package of worst-of-6 call options(yr2, yr3......etc), the sum of option payout is capped at 14%-7% = 7%, those options after yr2 could be expired if the early-termintation condition is satisfied..3)a package of digital call options(yr2, yr3......etc), the first option(yr2) is linked the worst performer strike level @107%(114%-107%), and the digital payout is the amount equal to par minus the present value of zero coupon bondif the first option is OTM with the coupon of yr2 is 2%, the strike level of second option(yr3) is 105%(107% - 2%), and the digital payoutis the amount equal to par minus the present value of zero coupon bond, it's lower than the payout of first option because of the present value...and other options could be handled in similar way....I guess it could be pricing by Quasi-Monte Carlo, it's a high dimensional MC problem(the no. of dimension is n*m, n: no of asset, m: no. of coupon), PJ's book is a good reference if you need to implement the pricing by yourselfLet me know if you have any idea, i guess there is more than one way to decompose TRAN just like other exotic financial instruments...

yes MC seems the only way of pricing TARN, it is highly path-dependent and there is no simple decompositiondon't forget the stochastic rates element: since the redemption date is unknown, you can't just freeze the zero curveI heard that many banks price Equity TARN without charging for stochastic rates... I predict some painful surprisese.

Random rates has an effect on the price, but it's generally smaller than you'd think. The variance of the equity is usually much more dominant than the variance of the interest rate. Correlation between the two is another issue all together. Generally, equities are more appealing as rates fall - lowers the price of a TARN, but that effect tends to be lagged. They are tricky products.