If the investor's thesis proves correct, then the IRL will rise in value, potentially generating above market rates of return. Conversely, if the thesis is incorrect, as a result of the aggressive nature of IRLs, investors could lose the entirety of their investment.
The takeaway: Interest rate linked structured notes should not be compared to bonds, as they are mostly used as speculative instruments and in seldom cases as part of a complex hedging strategy.
Bank Loan Products
Typically reserved for institutions and ultra-high-net-worth individuals, bank loan products are just as they name implies -- the investor is the lender.
The investment into bank loan products, typically structured in a fund format, is capital used to offer loans and other lending structures to third-parties. Moreover, most of bank loan products are structured as leveraged loans, thereby greatly increasing the risk associated with these instruments. Popular funds in this space include
PowerShares Senior Loan Portfolio
SPDR Blackstone/GSO Senior Loan
The takeaway: While these instruments can have significant returns, the risk is highly dependent on the skill and due diligence capabilities of the manager. In other words, with interest rate risk you lose the opportunity cost of yield but with credit rate risk, you can lose everything.
At the time of publication the author held GS.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.