Explanation:
A Special Purpose Vehicle (SPV) is a subsidiary of a company that is bankruptcy-remote from the main organization. The actions of an SPV are usually very tightly controlled, and they are only allowed to finance, buy, and sell assets.
Option B is the definition of mortgage-backed security.
Option C is the definition of a CDO.
Option D is partially the definition of a PAC tranche. However, a PAC tranche is not a subsidiary.
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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
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