FM for Actuaries

298 CHAPTER 9
annualized using 360-day year for commercial papers maturing in three months. Its
quoted value of 0.49% is higher than the 3-month Treasury bill rate of 0.27%, due
to its positive risk premium. 3
The bank prime loan rate is one of several base rates used by banks to price
short-term commercial loans. The quoted figure in Table 9.1 is based on rates
issued by the top 25 insured U.S.-chartered commercial banks.
The corporate bond yields are the average yields of Moody’s seasoned Aaa
and Baa bonds, which are the ratings for “prime” and “lower medium” grade bonds,
respectively. It can be seen that the yield ranking is in the decreasing order of
Baa, Aaa and Treasury constant maturities, due to the differences in default risk
premium.
The conventional mortgage rate is the average of contract interest rates on 30-
year fixed-rate first mortgages. This rate is based on the Primary Mortgage Market
Survey provided by Freddie Mac.
As the most important trading currency in the world, the U.S. dollar is widely
traded globally. Eurodollars are time deposits in U.S. dollar in banks outside the
U.S., and they are thus not under the jurisdiction of the Fed. While this term is
originally coined for U.S. dollars deposited in European banks, it has since been
expanded to include deposits in other markets, such as Tokyo. Consequently this
term has no connection with the Euro currency or the Euro zone. Indeed, the prefix
Euro is now used to indicate any currency held in a country in which it is not the
official currency, such as Euroyen or even Euroeuro.
London is currently the most important global market for trading currencies
worldwide. The London Interbank Offered Rate (LIBOR) is the interest rate
offered by leading banks in London that they would charge to other borrowing
banks. It is the primary benchmark for short-term interest rates around the world.
Since 2014, the ICE has taken over the administration of the LIBOR. It calculates
and publishes LIBOR every business day for five currencies (U.S. dollar, Euro,
British pound, Japanese yen and Swiss franc) for seven maturities (1 day, 1 week,
1-, 2-, 3-, 6- and 12-month). Table 9.1 shows the overnight (1-day) LIBOR for
three currencies.
In March 2016, the European Central Bank announced some stimulus measures
aimed at boosting recovery in the European region. It cut its main refinancing rate
to zero percent and its deposit rate to –0.4%. This measure caused a drop in the
LIBOR for the Euro. As can be seen from Table 9.1, the Euro LIBOR overnight
rate is in the negative territory.
3 Note that these two figures are both on a discount basis.