Running through some of the Kaplan Schweser Q-bank fixed income questions, I ran into something that seems contradictory. Here is the question, with what Schweser says is the correct answer:
And here is the relevant section in the book:
The book says that the TED spread is an indication of the overall credit risk in the economy, while the LIBOR-OIS spread is a measure of credit risk in the banking system. So… wouldn’t the answer to the above question be the LIBOR-OIS spread?
It looks that way.
Write Schweser and see what they say. Please let us know their response.
In CFA texts it says TED is for Banking systems. Follow CFA over Schweser
** KEY WORDING here is " When compared to the 10 year swap rate. Since the ted is using LIBOR and libor is the risk of banks…
from 2015 book - CFAi
The TED spread is an indicator of perceived credit risk in the general economy. TED is an acronym formed from US T-bill and ED, the ticker symbol for the eurodollar futures contract. 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 10-year swap spread, the TED spread more accurately reflects risk in the banking system, whereas the 10-year swap spread is more often a reflection of differing supply and demand conditions.