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The TED spread is an indicator of perceived credit risk in the general economy, [2] since T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing ...
The London Interbank Offered Rate (LIBOR) came into widespread use in the 1970s as a reference interest rate for transactions in offshore Eurodollar markets. [25] [26] [27] In 1984, it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options and forward rate agreements.
In order to measure liquidity situation, the spread between risk-free rates and overnight rates is considered. The TED spread is a liquidity indicator for the U.S., which is the difference between LIBOR and Treasury bills.
The spread between the LIBOR (or swap) rate and the government bond yield of similar maturity is usually positive, meaning that private borrowing is at a premium above government borrowing. This spread is a measure of the difference in the risk tolerances of the lenders to the two types of borrowing.
An overnight indexed swap (OIS) is an interest rate swap (IRS) over some given term, e.g. 10Y, where the periodic fixed payments are tied to a given fixed rate while the periodic floating payments are tied to a floating rate calculated from a daily compounded overnight rate over the floating coupon period.
The benchmark rate used to price many US financial securities is the three-month US dollar Libor rate. Up until the mid-1980s, the Treasury bill rate was the leading reference rate. However, it eventually lost its benchmark status to Libor due to pricing volatility caused by periodic, large swings in the supply of bills.
A short-term interest rate (STIR) future is a futures contract that derives its value from the interest rate at maturation. Common short-term interest rate futures are Eurodollar, Euribor, Euroyen, Short Sterling and Euroswiss, which are calculated on LIBOR at settlement, with the exception of Euribor which is based on Euribor and Euroyen which is based on TIBOR.
LIBOR vs Bond: Take advantage of anomalies in the spread between Bond and Libor Curves. Frequently, these above described anomalies occur when market participants are forced to make non-economic decisions due to accounting regulations, book clean-up, public furor or exuberance over a certain product, or sheer panic.