What is Structured Finance?

Category: Finance

1Definition

Complex financial instruments created by pooling assets and restructuring their cash flows into tranches.

2Context

Includes mortgage-backed securities and CDOs. Enables risk transfer but contributed to the 2008 financial crisis.

3Example

A bank bundles 1,000 mortgages into a security, selling slices to investors who receive the mortgage payments.

⚠Common Trap

Structured finance isn't inherently risky—the problem in 2008 was poor underlying assets and inadequate risk assessment.

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