Characteristics of the Debt Market

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Credit risk transfer vehicles are financial instruments by which credit risks are transferred from the financial institution to third party investors or individuals (Lucas, Goodman, Fabozzi, 2006). This type of instruments have been continuously transformed and improved throughout the last decades, including through securitization. In the last decade, the approach was diversified to include more complex instruments, such as credit derivatives and collateralized debt obligations (CDOs). The debt market was influenced by the diversification of these credit risk transfer vehicles, especially after the crisis of 2008-2009. One of the important characteristics of the debt market is its sensitivity to changes in interest rates (Morningstar Inc., 2010). A drop in interest rates will reduce the future cash flow that the owner of the bond is relying on and decrease the attractiveness of a particular bond (Investopedia, 2012). With this in mind, one of the argument that can be brought is that high volatility of interest rate will be transferred to the debt market, with potential impact on demand. At the same time, the problem with the more complex credit risk transfer vehicles is that these instruments, at least in their modern form, are sometimes backed up by assets of lower quality. If these are successfully packed up into a credit risk transfer vehicle and sold to a wide number of investors, as the recent crisis showed, eventually, the market will have been artificially

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