LIBOR: Why the Benchmark Interest Rate Was Phased Out
What Was LIBOR? LIBOR, or the London Interbank Offered Rate, was a benchmark interest rate that represented the average rate at which major global banks were willing to lend to each other on a short-term basis. It was calculated for five currencies (USD, GBP, EUR, JPY, CHF) and multiple borrowing periods, or “tenors,” ranging from...
Bond Ratings
What are Bond Ratings? Bond ratings are representations of the creditworthiness of corporate or government bonds. The ratings are published by credit rating agencies and provide evaluations of a bond issuer’s financial strength and capacity to repay the bond’s principal and interest according to the contract. The three private independent rating agencies – S&P, Moody’s,...
Credit Valuation Adjustment (CVA)
What is Credit Valuation Adjustment (CVA)? Credit Valuation Adjustment (CVA) is the price that an investor would pay to hedge the counterparty credit risk of a derivative instrument. It reduces the mark to market value of an asset by the value of the CVA. Credit Valuation Adjustment was introduced as a new requirement for fair...
Collateralized Debt Obligation (CDO)
What is a Collateralized Debt Obligation (CDO)? A Collateralized Debt Obligation (CDO) is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. The holder of the collateralized debt obligation can, in theory, collect the borrowed amount from the original borrower at the end of the loan...
Structured Investment Vehicle (SIV)
What is a Structured Investment Vehicle (SIV)? A structured investment vehicle (SIV) is a non-bank financial entity set up to purchase investments designed to profit from the difference in interest rates – known as the credit spread – between short-term and long-term debt. The long-term debt investments frequently include structured financial products like asset-backed securities (ABS),...
