Structured finance

Information about Structured finance

Corporate finance
Working capital management
Cash conversion cycle
Return on capital
Economic value added
Just In Time (business)
Economic order quantity
Discounts and allowances
Factoring (finance)
Capital budgeting
Capital investment decisions
The investment decision
The financing decision
Capital investment decisions
Sections
Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
Business plan
Corporate action
Finance series
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
Structured finance is a broad term used to describe a sector of finance that was created to help transfer risk using complex legal and corporate entities.

Unfortunately structured finance, while widely used, is rarely defined and does not have a consistent definition. But among those who practice and study structured finance, a fairly effective definition emerges.

Definition

The Global Financial System provided a definition of structured finance in their January 2005 report, "The role of ratings in structured finance: issues and implications". It stated "Structured finance instruments can be defined through three key characteristics: (1) pooling of assets (either cash-based or synthetically created); (2) tranching of liabilities that are backed by the asset pool (this property differentiates structured finance from traditional “pass-through” securitisations); (3) de-linking of the credit risk of the collateral asset pool from the credit risk of the originator, usually through use of a finite-lived, standalone special purpose vehicle (SPV)."[1] For an example of a structured finance deal please see Securitization.

Structure

Securitization

Main article: securitization
Securitization is the method which participants of structured finance utilize to create the pools of assets that are used in the creation of the end product financial instruments.

A securitization transaction

Main article: Securitization transaction
Because securitization is such an important tool used in structured finance, it is important to see how a securitization transaction would actually occur.

Tranching

Main article: Tranche
Tranching is an important concept in structured finance because it is the system used to create different investment classes for the securities that are created in the structured finance world. Tranching allows the cash flow from the underlying asset to be diverted to the various investor groups. The Committee on the Global Financial System explained tranching succinctly: "A key goal of the tranching process is to create at least one class of securities whose rating is higher than the average rating of the underlying collateral pool or to create rated securities from a pool of unrated assets. This is accomplished through the use of credit support (enhancement), such as prioritisation of payments to the different tranches."[1]

Credit enhancement

Main article: Credit enhancement
Credit Enhancement is key in creating a security that has a higher rating than the issuing company.

Credit ratings

Main article: Credit rating agency
Ratings play an important role in structured finance.

Structure

Other structures

There are numerous structures which may involve mezzanine risk participation, Options and Futures within structuring of financing as well as multiple stripping of interest rate strips. There is no laid-out fixed structure unlike in Securitization which is only a subset of the overall structured transactions. Esoteric transactions often have multiple lenders and borrowers distributed by distribution agents where the Structuring entity may not be involved in the transaction at all.

Types

There are several main types of structured finance instruments.
  • Asset-backed securities (ABS) are bonds or notes based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets.
  • Mortgage-backed securities (MBS) are asset-backed securities whose cash flows are backed by the principal and interest payments of a set of mortgage loans.
  • Collateralized debt obligations (CDOs) consolidate a group of fixed income assets such as high-yield debt or asset-backed securities into a pool, which is then divided into various tranches.
  • Collateralized mortgage obligations (CMOs) are CDOs backed primarily by mortgages.
  • Collateralized bond obligations (CBOs) are CDOs backed primarily by corporate bonds.
  • Collateralized loan obligations (CLOs) are CDOs backed primarily by leveraged bank loans.
  • Credit derivatives are contracts to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset.

External links

See also

References

1. ^ The Committee on the Global Financial System defined Structured Finance, "The role of ratings in structured finance: issues and implications", January 2005




 Structured finance  
Securitization
Securitization transaction | Credit enhancement | Tranche
Types of Securities
Asset-backed security | Mortgage-backed security | Credit derivative
Collateralized debt obligation | Collateralized mortgage obligation
Collateralized bond obligation | Collateralized loan obligation
Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to enhance corporate value while reducing the firm's financial risks.
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Cash conversion cycle or CCC, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business.
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    ROIC = (Net Operating Profit - Taxes) / (Total Capital)

See also

  • Cash flow return on investment (CFROI)
  • Cash return on gross investment (CROGI)
  • Profitability
  • Rate of profit
  • Tendency of the rate of profit to fall
  • Return on assets (ROA)

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Economic Value Added or EVA® is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital.
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For other uses, see Just In Time.
Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs.
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Economic order quantity (also known as the Wilson EOQ Model or simply the EOQ Model) is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory.

The model was originally developed by F. W.
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Discounts and allowances are reductions to a basic price. They could modify either the manufacturer's list price (determined by the manufacturer and often printed on the package), the retail price (set by the retailer and often attached to the product with a sticker), or
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Factoring is often used synonymously with accounts receivable financing. Factoring is a form of commercial finance whereby a business sells its accounts receivable (in the form of invoices) at a discount.
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Capital budgeting (or investment appraisal) is the planning process used to determine a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research and development projects.
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Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique.
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Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, government agencies, owners, and other stakeholders.
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Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions.
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mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly
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In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a financial year.
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business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals.
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A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial
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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects.
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In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices
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financial market participant categories, Investor vs. Speculator and Institutional vs. Retail. Action in financial market by Central banks is usually regarded as intervention rather than participation, although evidence exists in the Sprott '"Visible Hand of Uncle Sam"' report that
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Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to enhance corporate value while reducing the firm's financial risks.
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Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial
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Economic policy
Monetary policy
Central bank   Money supply
Fiscal policy
Spending   Deficit   Debt
Trade policy
Tariff   Trade agreement

Finance
Financial market
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bank is a commercial or state institution that provides financial services , including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.
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Financial regulations are a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system.
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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects.
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For the Parker Brothers board game, see risk (game)

Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event.
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Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both).

Faced by lenders to consumers

Main article: Consumer credit risk

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Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, classified into pools, and offered as collateral for third-party investment.
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Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, classified into pools, and offered as collateral for third-party investment.
..... Click the link for more information.
Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, classified into pools, and offered as collateral for third-party investment.
..... Click the link for more information.

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