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Structured finance refers to complex financial instruments that are designed to meet specific needs, often by pooling various financial assets, such as mortgages or loans, and repackaging them into securities that are sold to investors. These instruments, such as mortgage-backed securities (MBS) or collateralized debt obligations (CDOs), allow institutions to transfer risk, raise capital, and offer customized investment opportunities. Structured finance products are typically used by large institutions and require sophisticated risk analysis.
A bank creates a collateralized debt obligation (CDO) by pooling together various loans and repackaging them into securities that are sold to investors, allowing the bank to transfer the risk.
• Complex financial products created by pooling assets and repackaging them into securities.
• Used to transfer risk and raise capital.
• Includes instruments like MBS and CDOs.
It helps institutions manage risk, raise capital, and create tailored financial products for investors.
Mortgages, loans, credit card receivables, and other financial assets are commonly pooled to create structured finance products.
They are often complex and can carry significant risk, especially if the underlying assets perform poorly or if market conditions change.
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