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LOS d: Explain the swap rate curve (LIBOR curve) and discuss the reasons that market participants have increasingly used the swap rate curve as a benchmark rather than a government bond yield curve. ffice ffice" />
Q1. The swap rate curve is typically based on which interest rate?
A) The Fed Funds rate.
B) LIBOR.
C) Treasury bill and bond rates.
Correct answer is B)
The interest rate paid on negotiable CDs by banks in ffice:smarttags" />London is referred to as LIBOR. LIBOR is determined every day by the British Bankers Association. Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. The Fed Funds rate is the rate paid on interbank loans within the U.S. Treasury bill and bond rates are used for determining the yield curve, but not for the swap rate curve.
Q2. Which of the following is NOT a reason why market participants prefer the swap rate curve over a government bond yield curve? The swap market:
A) it is not affected by technical factors.
B) is free of government regulation.
C) reflects sovereign credit risk.
Correct answer is C)
Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. These rates are determined by market participants and are not regulated by governments. Swap rate curves are not affected by technical market factors that affect the yields on government bonds. The swap rate curve is also not subject to sovereign credit risk (potential government default on debt) that is unique to each country.
Q3. Compared to a yield curve based on government bonds, swap rate curves are:
A) less comparable across countries and have a greater number of yields at various maturities.
B) more comparable across countries and have a smaller number of yields at various maturities.
C) more comparable across countries and have a greater number of yields at various maturities.
Correct answer is C)
Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. These rates are determined by market participants and are not regulated by governments. Swap rate curves are not affected by technical market factors that affect the yields on government bonds. Swap rate curves are also not subject to sovereign credit risk (potential government default on debt) that is unique to government debt in each country. Thus swap rate curves are more comparable across countries because they reflect similar levels of credit risk. There is also a wider variety of maturities available for swap rate curves, relative to a yield curve based on US Treasury securities, which has only three on-the-run maturities of two years or more. Swap rate curves typically have 11 quotes for maturities between 2 and 30 years.
Q4. There has been an increasing trend to measuring corporate credit spreads relative to which of the following security classes?
A) Mortgage-backed securities.
B) Swaps.
C) Treasury securities.
Correct answer is B)
Due to the size and extensive use of the swap market there has been a shift from corporate credit spreads based on Treasuries to credit spreads linked to swaps.
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发表于 2009-3-17 17:47
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