GARP 2016-FRR Exam With Confidence Using Practice Dumps

A decrease in inflation rates typically leads to an increase in the price of fixed income instruments like bonds. Lower inflation increases the real value of the fixed payments received from bonds, making them more attractive to investors and driving up their prices.

The TED spread is calculated as the difference between the interest rates on interbank loans and short-term U.S. government debt (T-bills). Specifically, the TED spread = LIBOR - Treasury bill rate. In this case, the 3-month LIBOR rate is 2.5% and the yield on the 3-month U.S. Treasury bill is 0.5%. Thus, the TED spread is 2.5% - 0.5% = 2.0%.

While diversifying a bank’s credit portfolio helps spread out credit risks, the goal in debt management is to minimize the impact of defaults, and default risk cannot be fully hedged away, meaning it will always exist for the credit holder or the person insuring against it.

However, it is incorrect to state that the value of loan exposure changes similarly to equity investments. Loan exposures are generally less volatile compared to equities, and their value is typically more stable.