Interest Rate Spreads
The TED spread is calculated as the difference between Libor and the yield on a T-bill of matching maturity.
TED Spread Historical Data
It is important because it is an indicator of perceived economic risk, monetary liquidity, and perceived credit risk of the global financial banking system. Therefore it should be one of your indicators when considering investment risk. The index is used widely around the globe to set the interest rate of various variable rate loans.
United States Treasury Bill rates are considered the risk free rate because they are considered the safest credit in the world.
By comparing the risk free rate to any other interest rate an analyst can determine the perceived difference in risk. Investors, economists, and financial analysts use the TED spread to evaluate the level of risk in the financial system. Comparing the risk free rate to LIBOR provides an indication of the risk the global markets perceive in the global banking system. A rising or high TED spread will often precede a downturn in the stock market because it indicates increasing risk of bank defaults and economic instability.
A falling or low TED spread would indicate low risk of bank defaults and economic stability. This is the difference between a risk free investment 3-month T-bills and the interest rate at which global banks borrow and lend from each other.
Please let us know their response. Financial Exam Help Follow CFA over Schweser. The TED spread is an indicator of perceived credit risk in the general economy. The TED spread is calculated as the difference between Libor and the yield on a T-bill of matching maturity.
An increase decrease in the TED spread is a sign that lenders believe the risk of default on interbank loans is increasing decreasing. Therefore, as it relates to the swap market, the TED spread can also be thought of as a measure of counterparty risk.
Compared with the year swap spread, the TED spread more accurately reflects risk in the banking system, whereas the year swap spread is more often a reflection of differing supply and demand conditions. Skip to main content. Be prepared with Kaplan Schweser.