The TED spread is a useful indicator of the perceived lending risk in the financial markets because:
A) the measure rises when the risk of bank insolvency falls.
B) the measure becomes negative when the risk of bank insolvency rises.
C) the measure falls when the risk of bank insolvency rises.
D) the measure becomes negative when the risk of bank insolvency falls.
E) the measure rises when the risk of bank insolvency rises.

Question

Quizplus · Accepted Answer

The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt (T-bills). A rising TED spread indicates increasing perceived risk of lending between banks, as it shows that lenders require a higher interest rate to lend to other banks compared to risk-free government securities, suggesting a rise in the risk of bank insolvency.

The TED Spread Is a Useful Indicator of the Perceived