How Structured Financial Products Work

A seasoned financial executive with extensive experience in the development of new and efficient financial structures, Seth Koppes holds multiple patents and has been recognized for his innovative contributions to the field. Since 1993, Seth Koppes has served as CEO of Bancorp Services, LLC, a firm that assists large financial institutions and Fortune 500 organizations by developing innovative structured financial products.

Structured products are complex financial instruments with values that are based on the performance of underlying assets, such as stocks, bonds, and commodities. In a structured product, the conventional payment features of investment-grade securities are converted to non-traditional payoffs that are based on asset performance rather than the issuer’s cash flow.

With structured products, retail investors have the opportunity to gain access to derivatives and interest that are linked to pre-packaged groups of assets. These assets are typically institutional-level securities that would otherwise be unavailable to entities that are not institutional investors.

Issuers of structured products pay returns when the products mature. Besides the face value of the asset, additional payments are variable. Each investor will receive a profit that is dependent on the underlying assets’ ROI.

For example, consider a bank that issues notes as structured products, with each note having a $1,000 face value. Each note has two parts – a zero-coupon bond and a call option for an underlying equity (an index-tracking ETF) with a three-year maturity. The bank requires an investor to pay the face amount of $1,000 for the product on its issuing date. Since the note is principal-protected, the investor is certain to receive the face amount when the product matures, regardless of the performance of the underlying assets. They can also earn a return on a one-for-one basis if the note has a higher value when it matures.

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