Tuesday, 26 July 2011

Interest free rate?

As US is facing a debt crisis, time is ticking nearer to the deadline on its debt ceiling and deficit cut in their budget decision. If the outcome is that US has to default almost 40% of its debt, this will rewrite the history of using US Treasury Bill's rate as our interest free rate. For most academic study throughout history, we have been using that as a gauge for interest free rate for our calculation just because of US's AAA grade rating. If default is the only outcome, we will be in the center of the change for our economic history. Even if there is no default, US may still lose its AAA rating, thanks to the 3 rating agencies which have proven not effective in times like this.

Just as expected, CME Group announced on Monday that as part of their "normal review of market volatility," it has determined that T-Bills should no longer be treated as risk-free when used as collateral.

Read more: http://www.businessinsider.com/t-bills-no-longer-considered-risk-free-by-chicago-mercantile-exchange-2011-7#ixzz1TE7z9gAK

Just a 2 cent of thoughts, perhaps really all our textbook may change afterall. Maybe not... its how we view it after all.


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