Which of the following is TRUE about interest rates? A LIBOR rate is the only risk-free...

Which of the following is TRUE about interest rates?

A LIBOR rate is the only risk-free rate proxy that is used extensively by derivatives traders after the credit crisis that started in 2007.

Par yield is the coupon rate that causes the bond price to equal to is market value.

Bond yield is the single discount rate that gives the value of the bond equal to its par (or principal) value.

Treasury rate is considered to be artificially low and as a result Treasury rates are not used by derivatives dealers as a proxy for the risk-free rate.

Solutions

Expert Solution

(1) A LIBOR rate is the only risk-free rate proxy that is used extensively by derivatives traders after the credit crisis that started in 2007.

FALSE, its not the only,SFR and treasury yield are examples of rf rate proxy.

(2) Par yield is the coupon rate that causes the bond price to equal to is market value.

FALSE. par yield is the coupon rate that causes the bond price equal to par value not market value

(3) Bond yield is the single discount rate that gives the value of the bond equal to its par (or principal) value.

FALSE, bond yield is the rate used to discount CF's to arrive at intrinsic value i.e what the price of the bond should be.

(4) Treasury rate is considered to be artificially low and as a result Treasury rates are not used by derivatives dealers as a proxy for the risk-free rate.

TRUE.

jeff jeffy answered 1 year ago

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