Answer-first summary for fast verification
Answer: The Secured Overnight Funding Rate (SOFR) is based on the repo rates in actual repurchase agreement transactions, while LIBOR was based on estimated borrowing rates.
**D is correct.** SOFR is an interest rate index of the overnight repo-rates that uses interest rates observed in actual transactions. **A is incorrect.** In the US, the overnight interbank borrowing rate that banks charge each other to lend cash overnight is the fed funds rate, and it is not based on swap rates. The Fed does not determine these borrowing rates. **B is incorrect.** A repo agreement involves the transfer of securities that are agreed to be repurchased later, not merely pledged as collateral. All repurchase agreements are secured by collateral. **C is incorrect.** Only debt issued by developed countries in their own currencies is considered risk-free. Even though developing nations may be able to issue more of their currency they are not considered to be risk-free.
Author: LeetQuiz .
Ultimate access to all questions.
A newly hired junior analyst at a US-based bank is researching reference interest rates currently or historically used in various types of financial markets. The analyst studies how different interest rates are determined, and how they are applied to various debt instruments. Which of the following statements correctly describes the specified interest rate?
A
Overnight interbank borrowing rates are the overnight swap rates that the US Federal Reserve sets for the banks to charge each other to lend cash overnight.
B
A repo rate is the interest rate charged by one party to another on unsecured overnight borrowings.
C
An interest rate on government debt issued by any country in any currency can be considered risk-free and used for discounting purposes.
D
The Secured Overnight Funding Rate (SOFR) is based on the repo rates in actual repurchase agreement transactions, while LIBOR was based on estimated borrowing rates.
No comments yet.