Understanding Structured Products: A Comprehensive Guide

Structured products are a type of security that combines more than one investment in order to provide a customized investment return. Many structured products combine bonds and options into a single investment instrument. Many people like this type of investment because of its relative safety and exposure to the financial markets. Here are a few things to consider about structured products and how they work.

Structured Products

A structured product is a type of investment vehicle in which a traditional form of investment is combined with a more nontraditional element. For example, with traditional corporate bonds, you invest a certain amount of money which is known as the principal. Then, you receive regular coupon payments from the company in which you invested in. With structured products, you might invest in a corporate bonds but you do not receive regular interest payments. Instead of receiving traditional interest payments, your returns are tied to some outside circumstance. If the circumstances line up correctly, you will be able to receive a far superior return to what you would have been able to get with traditional interest payments. If things do not go according to plan, you will simply get your initial investment back without any interest.

Options

This strategy is put into effect by utilizing an option. The option is taken out on a particular outcome and if the outcome has been achieved, at the end of the term, the option will be exercised and the investor will be able to net a nice return. If the condition has not been met, the option is allowed to expire without any negative consequences. At that point, the investor would only get back the principal of the investment.

Principal Safety

One of the big advantages of investing in structured products is that you will be able to get your initial investment back. This is much like a traditional bond except that you get the potential returns of investing in the market. This essentially gives investors the best of both worlds. You can make sure that your initial investment is safe and you can get some great returns at the same time. Typically with safe investments, you have to sacrifice and take smaller returns. This is not necessarily the case with structured products.

Zero Coupon Bonds

In many cases, a zero coupon bond is used in structured products in order to secure the principal. A zero coupon bond is a type of bond that does not make coupon payments. Instead, you purchase the bond for a discount and then when it matures, it is worth the face value. With this system, part of the initial investment goes to pay for a zero coupon bond that will be worth your initial investment at the end of the term. The other part of your initial investment goes to secure an option that can be used to significantly increase your returns on your investment.