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Structured finance refers to a complex financial transaction involving large financial institutions and companies with unique needs.

Typically, structured finance is not right for a regular borrower seeking a normal loan. An entity seeking a structured finance product is likely one in need of a large chunk of capital. It is more likely to use collateralized debt obligations, collateralized bond obligations, syndicated loans, or some other synthetic financial instrument.

For example, a collateralized debt obligation, or CDO, is a structured finance product that combines assets offering fixed-income into an investment that offers different levels of risk and reward. The assets are frequently mortgages, which provide investors with collateral. Mortgage borrowers make payments and create a CDO, which is sold to an investment bank and sliced into tranches.

The principal and interest payments made on the mortgages are redirected to investors who buy the tranches. The investment bank sells the CDO, thus freeing capital to use for other purposes.

Structured finance offers a company a way to generate capital for operations or expansion.

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