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Financial Terms and Role in the Market

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Define he following terms and explain (extensively) their role in the financial markets: SIV, CDO, STRIP, FEDERAL FUND RATE, LIBOR.

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Solution Summary

This solution defines the following terms and explains their role in the financial markets: SIV, CDO, STRIP, FEDERAL FUND RATE, LIBOR, including examples. Supplemented with two descriptive articles on these concepts.

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Let's take a closer look at various definitions as they relate to the role in the financial markets. I provided the links for these definitions, hyperlinks for related terms (see the attached WORD response for the active links: Posting 178868.doc) and also two supporting resources for expansion.


1. Define he following terms and explain (extensively) their role in the financial markets: SIV, CDO, STRIP, FEDERAL FUND RATE, LIBOR.

1. Structured Investment Vehicle (SIV)

SIV is a pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS). Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. The SIV earns profits on the spread between incoming cash flows (principal and interest payments on ABS) and the high-rated commercial paper that it issues. SIVs often employ great amounts of leverage to generate returns. (Source: http://www.investopedia.com/terms/s/structured-investment-vehicle.asp)

In other words, a structured investment vehicle (SIV) is a special purpose vehicle that buys long term bonds and other fixed income securities, funding this with by issuing short or medium term debt such as commercial paper. The securities an SIV buys are often mortgage books or some other from of asset backed security. This should be profitable because of the shape of the yield curve. Although this is often described as arbitrage it is not because it is uncovered. (Source: http://moneyterms.co.uk/siv/)

SIVs are also called conduits because they create a channel through which the long term debt they invest in can be funded by short term debt. They have also proved to be a conduit through which banks have bought back mortgage debt that they had apparently off-loaded through securitisation ? although the banks that buy may not be those that sold, the risk comes back into the banking system. SIVs can be very profitable because they are highly geared and returns on ...

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