Question #43
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 17
Status: Correct
Correct Answer: A
Question
Compared to a yield curve based on government bonds, swap rate curves are:
Answer Choices:
A. more 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. less comparable across countries and have a greater number of yields at various maturities
Explanation
Swap rate curves are typically determined by dollar denominated borrowing based on
MRR. 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 four on-
the-run maturities of two years or more. Swap rate curves typically have 11 quotes for
maturities between 2 and 30 years.