Overview
Structured securities are typically very similar to bonds or other fixed income instruments. This is not very surprising given the fact that the cash flows of the structured security come from the cash flow of other fixed income instruments. Just like other fixed income securities, there is an uncertainty in the amount and timing of the cash flows due to
- Pre-payment risk
- Credit Risk
Valuations Types
- Yield - a simple proxy for value, the instruments yield can give an indication of the its value. An important consideration when considering the yield of the security is the negative convexity.
- Present Value of Cash Flows - similar to other fixed income securities, the value of a structured security is the discounted value of the securities cash flows. This requires have a forecast of the cash flows, and an appropriate discount rate.