Reading 65: Understanding Yield Spreads - LOS j ～ Q1-3

答案和详解如下：

1.The interest rate paid on negotiable CDs by banks in London is referred to as:

A)   the Fed Funds rate.

B)   the discount rate.

C)   the London rate.

D)   LIBOR.

The correct answer was D)

The interest rate paid on negotiable CDs by banks in London is referred to as LIBOR. LIBOR is determined every day by the British Bankers Association. The Fed Funds rate is the rate paid on interbank loans within the U.S. The discount rate is the interest rate that the Federal Reserve changes member banks for loans. The London rate is a fabricated term in this context.

2．The most important LIBOR rate for funded investors is the:

A)   20 year rate.

B)   10 year rate.

C)   5 year rate.

D)   1 year or less rate.

The correct answer was D)

A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin (e.g. LIBOR plus 30 basis points).

3．A funded investor has a short-term investment returning a 7 percent return. The borrowing costs are 20 basis points above the reference rate. If the T-bill rate is 3 percent and the LIBOR rate is 3.5 percent, what is the investor’s current profit on this investment?

A)   3.3%.

B)   1.5%.

C)   3.8%.

D)   2.0%.

The correct answer was A)

A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin, here LIBOR plus 20 basis points. Thus in this example, the investor’s cost of funds is 3.7%. His profit is then 7%-3.7% = 3.3%.