Skip to content

CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments

Compared with an FRN indexed to a government Treasury bill rate, an FRN indexed to a bank-lending reference rate that includes bank credit risk will most likely have:

An FRN indexed to a bank-based reference rate will most likely have a higher index level than one tied to Treasury bills of the same tenor. The bank rate includes compensation for bank credit and liquidity risk, whereas government bill rates are close to risk-free.

  1. Aa reference rate that is lower for the same maturity
  2. Bno sensitivity to changes in market interest rates
  3. Ca reference rate that tends to be higher for the same maturityCorrect

Explanation

Rates reflecting bank credit risk embed a spread over risk-free government rates, so they tend to be higher for the same tenor. Both index types reset with market rates, so sensitivity is not eliminated. The lower-rate option reverses the relationship.

Did you get it right without looking?

One question tells you little. A timed set on Yield and Yield Spread Measures for Floating-Rate Instruments shows your real accuracy, how long you take and where you lose marks.

Practise Yield and Yield Spread Measures for Floating-Rate InstrumentsFree diagnostic mock

More Yield and Yield Spread Measures for Floating-Rate Instruments questions