Types of Bonds

Collateralised Bonds-Securitisation, Structured Products and Covered Bonds

What are Structured Products?

Many different types of products are “structured” to some extent. “Structuring” usually refers to any type of obligation that is not a straightforward secured or unsecured government or corporate obligation. Although these types of transactions are usually issued through special purpose vehicles (SPVs), this is not always the case. For example, securitisations are one type of structured product. Another type of structured product refers to a packaging or repackaging of bonds together with various types of interest rate swaps and/or credit derivatives to change the interest and principal payment stream, in order to provide an investor with a particular risk profile that they want. For example, a government bond could be placed into an SPV — a subsidiary company entity which is used to isolate financial risk. Then the fixed rate on that government bond could be converted to a floating rate--or alternatively to a rate based on changes in a certain fixed income, or even equity, index. These types of structured products can be either reissued out of an SPV or be directly issued by a bank or non-bank. In some cases, these products are also called “structured credit” if they involve products with some type of corporate or asset-related credit risks.

Securitisations, structured products and structured credit can be relatively simple in structure or very complex.  Due to the complexity of structured products, they are rarely part of traditional retail investor portfolios or fund offerings.

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