Browse Analysis of Managed and Structured Products

23. Structured Products

Discover the privileges and perils of structured products, including principal-protected notes, market-linked GICs, split shares, asset-backed securities, and mortgage-backed securities.

Structured Products: 23

Chapter Overview

In this chapter, you will explore the various features of structured products, including their advantages, disadvantages, and inherent risks. You will understand how these products are constructed and the tax implications associated with various types of structured products.

Learning Objectives

  1. Summarize the advantages, disadvantages, and risks of investing in structured products.
  2. Describe the features, risks, benefits, and tax implications of principal-protected notes.
  3. Describe the structure, risks, and tax implications of market-linked guaranteed investment certificates.
  4. Describe the structure, risks, and tax implications of split shares.
  5. Understand the securitization process for asset-backed securities.
  6. Describe asset-backed commercial papers and mortgage-backed securities.

Content Areas

  • Overview of Structured Products
  • Principal-Protected Notes
  • Market-Linked Guaranteed Investment Certificates
  • Split Shares
  • Asset-Backed Securities
  • Asset-Backed Commercial Paper & Mortgage-Backed Securities

Key Terms

Key terms defined in the glossary appear in bold text throughout the chapter. Here’s a brief overview of these terms:

  • Asset-Backed Commercial Paper (ABCP): Short-term investments backed by other financial assets.
  • Principal-Protected Notes (PPNs): Debt instruments with a guarantee of the return of the principal amount invested.
  • Asset-Backed Securities (ABS): Financial securities backed by a loan, lease, or receivables against assets other than real estate.
  • Roll-Over Risk: The risk that a borrower will not be able to refinance by borrowing to repay existing debt.
  • Capital Shares: Shares issued by a company to raise equity capital.
  • Special Purpose Vehicles (SPVs): Entities created solely to isolate financial risk.
  • Market-Linked Guaranteed Investment Certificates (GICs): Investments that guarantee the principal and provide returns linked to a specific market index.
  • Split Shares: Shares divided into multiple classes, often involving capitalization of whole shares.
  • Structured Product: Prepackages investment strategy based on derivatives.
  • Mortgage-Backed Security (MBS): Investments secured by mortgages collected by financial institutions.
  • Tranche: A piece, portion or slice of a deal or structured financing.
  • Mortgage Pass-Through Securities: A category of MBS where cash flow from the mortgage pool is passed to the security holders.
  • Zero-Coupon Bond Plus Option Structure: A financial product involving a bond not paying interest and an option to buy assets.
  • Prepayment Risk: The risk associated with the early unscheduled return of principal on fixed-income securities.

Frequently Asked Questions (FAQs)

1. What are structured products? Structured products are pre-packaged investments that use derivatives and other financial instruments to provide tailored investment solutions. They are designed to facilitate highly customizable investment strategies.

2. What benefits do structured products offer? Benefits of structured products include customized risk-return trade-offs, access to a range of asset classes, and potential tax benefits through sophisticated structuring.

3. What are the risks associated with structured products? Risks include complexity risk, liquidity risk, credit risk, and market risk. These products can sometimes have limited secondary market trading, which might impact liquidity.

4. How are principal-protected notes different than traditional bonds? Principal-protected notes (PPNs) guarantee the return of principal but link their returns to an underlying market index or a basket of assets, unlike traditional bonds that provide a fixed interest income.

Key Takeaways

  • Understand the fundamental features of structured products and their associated risks and rewards.
  • Recognize various types of structured products such as principal-protected notes, market-linked GICs, split shares, and asset-backed securities.
  • Identify the tax implications and investment benefits of structured products.
  • Grasp the role of special purpose vehicles and various forms of asset-backed securities in structured investments.
  • Assess the impact of market movements and macroeconomic conditions on structured products.

Understanding these components sets a solid foundation for examining more complex financial instruments within the Canadian securities market.


📚✨ Quiz Time! ✨📚

🧐 Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! You’ll find 10 carefully curated quizzes designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you’re on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck! 🍀💪

## What is the primary focus of Chapter 23 in the Canadian Securities Course? - [ ] Fundamental Analysis - [x] Structured Products - [ ] Personal Financial Planning - [ ] Derivative Instruments > **Explanation:** Chapter 23 focuses on providing an overview of structured products, including their features, benefits, and associated risks and tax implications. ## Which of the following is a key component covered under the learning objectives of Chapter 23? - [ ] Analysis of stocks and bonds - [x] Principal-Protected Notes - [ ] Corporate governance structures - [ ] Retirement planning > **Explanation:** The key learning objectives include understanding the features, benefits, risks, and tax implications of structured products, particularly principal-protected notes. ## What term refers to the process where loans, receivables, and other financial assets are pooled together to create a security? - [ ] Mortgage borrowing - [ ] Credit scoring - [x] Securitization - [ ] Leasing > **Explanation:** Securitization is the process where various financial assets are pooled together to create a new security, often termed as asset-backed securities. ## What are the investment risks called that arise from the possibility that the borrower will pay back the loan before its maturity date? - [x] Prepayment risk - [ ] Credit risk - [ ] Liquidity risk - [ ] Interest rate risk > **Explanation:** Prepayment risk pertains to the likelihood that a borrower may pay back the loan earlier than the scheduled maturity date, impacting the expected returns. ## What type of structured product is defined by its return being related to the performance of an underlying asset or index, providing capital protection up to a specific period? - [ ] Split Shares - [x] Principal-Protected Notes - [ ] Asset-Backed Commercial Paper - [ ] Mortgage Pass-Through Securities > **Explanation:** Principal-Protected Notes (PPNs) are structured products that guarantee the return of principal at maturity, with returns tied to the performance of an underlying asset or index. ## What key feature distinguishes market-linked guaranteed investment certificates from regular guaranteed investment certificates? - [ ] Zero interest rate - [x] Returns linked to market indexes - [ ] Fixed returns irrespective of market conditions - [ ] Absence of any financial risk > **Explanation:** Market-Linked Guaranteed Investment Certificates (GICs) have returns linked to stock markets or other indexes, unlike traditional GICs that offer fixed interest rates. ## What are the specially created legal entities called that carry out the securitization process? - [ ] Asset pools - [ ] Investment funds - [ ] Financial intermediaries - [x] Special purpose vehicles > **Explanation:** Special Purpose Vehicles (SPVs) are entities created specifically to undertake securitization by isolating the parent company from risk. ## Which structured product primarily involves dividing a company's capital structure into capital and dividend returns, offering distinct returns to investors? - [ ] Principal-Protected Notes - [x] Split Shares - [ ] Asset-Backed Commercial Paper - [ ] Mortgage Pass-Through Securities > **Explanation:** Split shares divide a company’s capital structure into separate portions for capital and dividend returns, catering to investors with different risk preferences. ## What key concepts are covered when discussing asset-backed securities? - [ ] Market speculation - [ ] Personal budget planning - [x] Securitization process - [ ] Corporate leadership > **Explanation:** The discussion on asset-backed securities involves understanding the securitization process, where financial assets are pooled to create tradable securities. ## What is the term for structured products with a combo of a zero-coupon bond and an option structure? - [x] Zero-coupon bond plus option structure - [ ] Convertible bonds - [ ] Covered call writing - [ ] High-yield bonds > **Explanation:** Zero-coupon bond plus option structure combines a zero-coupon bond with options, often found in principal-protected notes.

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In this section

  • 23.1 Introduction
    Learn about the features, advantages, and evolution of structured products in investment, as well as their role in providing unique risk, return, tax, and diversification benefits.
  • 23.2 Overview Of Structured Products
    This section provides an in-depth understanding of structured products, defining their advantages, disadvantages, associated risks, and more. Learn about the benefits and features that make structured products an interesting investment vehicle.
    • 23.2.1 Types Of Structured Products
      Detailed overview of various types of structured products including principal-protected notes, market-linked guaranteed investment certificates, split shares, mortgage-backed securities, and asset-backed securities.
    • 23.2.2 Advantages Of Structured Products
      Learn about the advantages and features of structured products within the Canadian securities landscape. Understand their benefits, risks, and tax implications.
Saturday, July 13, 2024