Chapter 23 - Structured Products (Done)

Question 1

What are structured products?

Answer 1

Passive investment vehicles with specific risk and return characteristics.

Question 2

What are the five types of structured products discussed?

Answer 2

PPNs, Market Linked GICs, Split Shares, Mortgage-backed Securities, Asset-backed Securities.

Question 3

What are Principal Protected Notes (PPNs)?

Answer 3

Bank-issued debt securities linked to an equity index or similar, promising return of principal.

Question 4

What is the main difference between Market Linked GICs and PPNs?

Answer 4

Market Linked GICs combine principal guarantee with some growth potential and are popular with conservative investors.

Question 5

What are split shares?

Answer 5

Equity securities that divide investment attributes into preferred shares and capital shares.

Question 6

What are the pros and cons of structured products?

Answer 6

• Pros: Professional management, economies of scale, diversification.
• Cons: Difficult risk assessment, illiquidity, high built-in costs, prepayment risk.

Question 7

What is prepayment risk in structured products?

Answer 7

The risk that underlying debt might be prepaid early, affecting returns.

Question 8

What are the features of Principal Protected Notes?

Answer 8

Debt issued by banks with maturity date, face value, principal return promise, and interest tied to underlying asset performance.

Question 9

How do participation rates and performance caps work in PPNs?

Answer 9

• Participation Rate: PPN captures a percentage of the underlying asset’s returns.
• Performance Cap: PPN has a maximum return limit.

Question 10

How do Market Linked GICs work?

Answer 10

Combine principal guarantee with growth potential based on underlying index performance, with participation rates.

Question 11

What are asset-backed securities (ABS)?

Answer 11

Bonds with claims on principal and interest from a pool of receivables, structured through a special purpose vehicle.

Question 12

What are the different tiers of asset-backed securities?

Answer 12

Senior, Mezzanine, Junior tiers, each with different credit risks and claims on income.

Question 13

What are mortgage-backed securities (MBS)?

Answer 13

Bonds with claims on mortgage principal and interest, carrying risks like interest rate, credit, and prepayment risk, protected by CMHC.