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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

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

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

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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