What are structured products?

Structured products are pre-packaged investments that normally include assets linked to interest plus one or more derivatives. They are generally tied to an index or basket of securities and are designed to facilitate highly customized risk-return objectives. This is accomplished by taking a traditional security such as a conventional investment-grade bond and replacing the usual payment features—periodic coupons and final principal—with non-traditional payoffs derived from the performance of one or more underlying assets rather than the issuer's own cash flow.

How are returns generated?

Issuers normally pay returns on structured products once it reaches maturity.1 Payoffs or returns from these performance outcomes are contingent in the sense that, if the underlying assets return "x," then the structured product pays out "y." This means that structured products are closely related to traditional models of options pricing, although they may also contain other derivative categories such as swaps, forwards, and futures, as well as embedded features that include leveraged upside participation or downside buffers.