a. Structured financial instruments are the instruments presented to large financial institutions or companies with complicated financing needs that don’t match conventional financial products.
b. These are mainly for the extensive corporations with specific needs that conventional financial instruments cannot satisfy.
c. These are riskier instruments.
d. These mainly cater to the needs for a huge amount of finance, especially for major capital injection into corporations.
e. These instruments are mainly non-transferable, so much, that they cannot be shifted between various types of debt as the normal debt.
f. These are not usually offered by traditional lenders.
g. Major types of structured financial instruments are:
i. Collateralized Debt Obligations (CDOs). is a structured finance product that combines assets offering fixed income, into an investment that offers different levels of risk and reward. The assets are mostly mortgages that provide investors the collateral. The mortgage borrowers make payments and create a CDO which is sold to an investment bank and sliced into tranches. The interest and principal payments made on the mortgages are redirected to investors, who buy the tranches. The investment banks sell the CDO, thus freeing the capital to be used for other purposes.
ii. Collateralized Bonds Obligations (CBO). Like CDOs, CBOs are the bonds that use a variety of high-yield junk bonds as collaterals. These bonds are separated or pooled into tranches with higher and lower levels of risk.
iii. Syndicated Loans. A syndicated loan is a form of loan business in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and with different duties and sign the same loan agreement. Usually, one bank is appointed as the agency bank to manage the loan business on behalf of the syndicate members.