Explanation:
A Special Purpose Vehicle (SPV), also known as a Special Purpose Entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Its legal status makes its obligations secure even if the parent company goes bankrupt. SPVs are widely used in the securitization process, but its primary defining aspect is being a bankruptcy-remote entity. Option B defines a Mortgage-Backed Security (MBS). Option C defines Collateralized Debt Obligations (CDOs) or Asset-Backed Securities (ABS).
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Q.64 What is the most likely definition of a Special Purpose Vehicle (SPV)?
A
A subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt
B
A type of asset-backed security that is secured by a mortgage or collection of mortgages
C
A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors
D
A subsidiary that reduces the effects of prepayment risk – the risk that the principal amount will be paid ahead of schedule