In structured finance

Structured finance

Structured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid lawsStructured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid laws...

 the Capital note is the most junior security issued by a Structured investment vehicle

Structured investment vehicle

A structured investment vehicle was an operating finance company established to earn a spread between its assets and liabilities like a traditional bank...

. It is comparable to the Equity Tranche

Tranche

In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. The word tranche is French for slice, section, series, or portion, and is cognate to English trench . In the financial sense of the word, each bond is a different slice of the deal's...

 of a CDO

Collateralized debt obligation

Collateralized debt obligations are a type of structured asset-backed security with multiple "tranches" that are issued by special purpose entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand...

. Investors who buy the Capital Notes are the first in line to bear risk if the cash flows from the SIV's assets are insufficient to cover promised payments to all investors.

See Securitization transaction for more details on how the process of slicing up risk (or "tranching") works.