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.
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