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Structured investment vehicle siv

Structured Investment Vehicle (SIV)

A Structured Investment Vehicle (SIV) is a type of special-purpose entity that borrows money by issuing short-term debt, such as commercial paper, and invests the proceeds in longer-term, higher-yielding assets, such as mortgage-backed securities (MBS). SIVs are designed to profit from the difference between short-term borrowing costs and long-term investment returns. However, they are highly vulnerable to market disruptions, as seen during the 2007–2008 financial crisis.

Example

An SIV raises capital by selling short-term commercial paper and invests it in long-term mortgage-backed securities, aiming to profit from the interest rate spread.

Key points

• Special-purpose entity that borrows short-term and invests in long-term assets.

• Aims to profit from the spread between borrowing costs and investment returns.

• Risky and vulnerable to market disruptions, as seen in the financial crisis.

Quick Answers to Curious Questions

What is the main risk associated with Structured Investment Vehicles (SIVs)?

SIVs are vulnerable to liquidity risks, especially when short-term borrowing markets dry up or long-term assets underperform.

How do SIVs profit from interest rate spreads?

They borrow money at low short-term rates and invest in higher-yielding long-term assets, aiming to capture the difference.

What role did SIVs play in the 2007–2008 financial crisis?

Many SIVs faced liquidity problems when they were unable to roll over their short-term debt, contributing to the broader market collapse.

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