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SARON practice questions

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Question 1Swiss money market and interest rate environment

Which institution publishes the SARON fixing each trading day and acts as the benchmark administrator for the Swiss franc interest rate benchmarks?

  1. The London Stock Exchange Group, through its benchmark subsidiary
  2. The Swiss National Bank, in its role as monetary authority
  3. The European Money Markets Institute
  4. SIX Financial Information, on behalf of SIX Swiss Exchange Correct answer.

Explanation

SARON is administered within the SIX group; SIX Financial Information computes and publishes the fixing under the benchmark regulation framework. The SNB is the central bank and does not administer the benchmark.

Question 2Swiss money market and interest rate environment

SARON is computed from which underlying market?

  1. The Swiss franc repo market on the SIX Swiss Exchange trading platform Correct answer.
  2. The Swiss government bond secondary market
  3. The CHF overnight FX swap market
  4. The unsecured Swiss franc interbank deposit market

Explanation

SARON stands for Swiss Average Rate Overnight and is derived from repo transactions concluded on the SIX Swiss Exchange repo platform. It is a secured, transaction-based rate, not an unsecured quote-based rate.

Question 3Swiss money market and interest rate environment

What is the standard term of the SARON fixing that is published as the reference rate?

  1. Overnight, with the rate applying to the next business day Correct answer.
  2. One week
  3. Three months
  4. One month

Explanation

SARON is an overnight rate: repo transactions with a one-business-day term are used, and the resulting rate applies from the trade date to the following business day. Longer tenors are not part of the benchmark itself.

Question 4Swiss money market and interest rate environment

Which currency does SARON reference?

  1. US dollar
  2. Swiss franc Correct answer.
  3. Pound sterling
  4. Euro

Explanation

SARON is the Swiss franc overnight reference rate, derived from CHF repo transactions. Its currency scope is therefore CHF, which matters for products documented under Swiss law.

Question 5Swiss money market and interest rate environment

In a compounded SARON arrears structure, how is the interest amount for a coupon period determined?

  1. By compounding the daily SARON fixings observed over the period, with the final amount known only near period end Correct answer.
  2. By applying the SARON fixing observed two business days before period start
  3. By applying the SARON fixing observed on the first day of the period for the whole period
  4. By averaging forward-looking term SARON quotes collected on the determination date

Explanation

Compounded SARON in arrears accrues daily interest using each day's fixing and compounds it across the period, so the final coupon is only known close to the payment date. This arrears observation is the standard market convention for SARON cash products.

Question 6Swiss money market and interest rate environment

Which statement best describes the difference between SARON and a forward-looking term rate such as a three-month SARON term fixing?

  1. SARON is published monthly, while a term rate is published daily
  2. SARON is set by the SNB, while a term rate is set by the government
  3. SARON is a backward-looking overnight transaction rate, while a term rate is a forward-looking rate set at the start of the period Correct answer.
  4. SARON is unsecured, while a term rate is secured

Explanation

SARON is computed from overnight repo transactions and is therefore backward-looking, whereas term fixings are forward-looking and fixed at the beginning of the interest period. This distinction drives settlement timing and hedging differences between the two.

Question 7Swiss money market and interest rate environment

A bond pays compounded SARON plus a spread, observed in arrears with a five-business-day lag. What is the main purpose of the observation lag?

  1. To convert the floating rate into a fixed rate
  2. To reduce the credit spread paid to investors
  3. To align the coupon with the SNB policy meeting calendar
  4. To give the calculation agent time to compute and notify the final rate before payment Correct answer.

Explanation

Because compounding in arrears produces a final rate only at period end, a lag shifts the observation window earlier so the calculation agent can determine and communicate the amount before payment. It is an operational mechanism, not a change in the economics of the spread.

Question 8Swiss money market and interest rate environment

What role does the Swiss National Bank play with respect to SARON?

  1. It uses SARON as a reference for monetary policy implementation but does not administer the benchmark Correct answer.
  2. It calculates and publishes the SARON fixing on its own platform
  3. It sets SARON by decree each morning
  4. It guarantees a floor under SARON at zero

Explanation

The SNB is the monetary authority and observes SARON as a market reference, but the benchmark is administered within SIX. The SNB does not compute the fixing or set it administratively.

Question 9Swiss money market and interest rate environment

Which market condition would most directly push the SARON fixing upward?

  1. Tighter CHF liquidity raising the rate at which banks lend cash against repo collateral Correct answer.
  2. A decline in the volume of Swiss equity trading on SIX
  3. An increase in the SNB's foreign currency reserves
  4. A widening of the spread between Swiss and German government bond yields

Explanation

SARON reflects the price of secured CHF cash in the repo market, so tighter liquidity raises repo rates and lifts the fixing. Equity volumes and reserve levels do not enter the calculation directly.

Question 10Swiss money market and interest rate environment

How does SARON behave in a negative interest rate environment?

  1. It is floored at zero by the benchmark administrator
  2. It is replaced automatically by a term rate
  3. It can fix below zero, and compounded SARON accrual can be negative Correct answer.
  4. It is suspended until rates turn positive

Explanation

SARON has no zero floor and has fixed at negative levels during periods of negative policy rates. Compounded arrears accrual then reduces the coupon, subject to any contractual floor in the specific product.

Question 11Swiss money market and interest rate environment

A loan agreement references SARON compounded in arrears but contains a zero floor on the coupon. What happens when compounded SARON plus the spread is negative for a period?

  1. The calculation agent resets the spread to restore a positive coupon
  2. The negative amount is carried forward and deducted from the next coupon
  3. The coupon is set to zero and no negative interest is paid Correct answer.
  4. The loan converts to a fixed rate loan

Explanation

A zero floor operates as a contractual minimum on the coupon, so a negative computed rate plus spread is lifted to zero. Without such a floor the borrower would receive negative interest.

Question 12Swiss money market and interest rate environment

Which best explains why SARON is considered a robust reference rate compared with the discontinued CHF LIBOR?

  1. It is based on actual secured repo transactions rather than panel bank submissions Correct answer.
  2. It is set by a larger panel of banks than LIBOR was
  3. It is backed by an explicit government guarantee
  4. It is calculated only once a month, reducing manipulation risk

Explanation

Transaction-based benchmarks rest on observable repo trades, which reduces reliance on expert judgement in submissions. This is the core reason regulators favoured overnight risk-free rates over quote-based IBORs.

Question 13Swiss money market and interest rate environment

Which Swiss franc money market instrument typically references SARON as its floating rate basis?

  1. A Swiss federal government fixed coupon bond
  2. A CHF-denominated fixed term deposit
  3. A listed Swiss equity index fund
  4. A CHF floating rate note with quarterly coupon resets Correct answer.

Explanation

Floating rate notes are the classic cash product that references a short-term benchmark plus a spread. Fixed coupon bonds and fixed deposits carry no floating reference.

Question 14Swiss money market and interest rate environment

What does the term 'spread' represent in a SARON plus spread floating rate note?

  1. The fee charged by the benchmark administrator
  2. A fixed margin added to the compounded benchmark to reflect the issuer's credit and liquidity risk Correct answer.
  3. A variable adjustment that resets with each SARON fixing
  4. The difference between the SARON fixing and the SNB policy rate

Explanation

The spread is a contractual fixed margin compensating the investor for credit, liquidity, and structural features of the note. It is set at issuance and does not vary with the daily fixing.

Question 15Swiss money market and interest rate environment

Which day count convention is most commonly paired with compounded SARON coupons on CHF notes?

  1. Actual/360 Correct answer.
  2. Actual/Actual
  3. 30/360
  4. Actual/365 fixed

Explanation

CHF money market conventions typically use Actual/360 for SARON-linked floating rate notes, consistent with the underlying overnight money market. The choice affects the size of each daily accrual.

Question 16Swiss money market and interest rate environment

How is the compounded SARON rate typically calculated over a period?

  1. By applying a compounding formula to the product of one plus the daily accruals, adjusted for the number of days Correct answer.
  2. By using the fixing on the last day of the period for the whole period
  3. By using only the highest and lowest fixings in the period
  4. By taking the arithmetic mean of the daily fixings without compounding

Explanation

Compounded SARON multiplies the daily growth factors and annualises the result over the period length. This captures the reinvestment effect that a simple average ignores.

Question 17Swiss money market and interest rate environment

Which statement about the observation period for compounded SARON in arrears is correct?

  1. It always coincides exactly with the coupon period end
  2. It begins one month before the coupon period starts
  3. It usually ends a few business days before the coupon payment date Correct answer.
  4. It is defined by the SNB rather than by the contract

Explanation

Market convention shifts the observation period earlier by a short lag so the final compounded amount can be calculated and paid on time. The lag length is specified in the transaction documents.

Question 18Swiss money market and interest rate environment

A treasurer expects CHF short-term rates to fall and wants a floating exposure that benefits quickly. Which feature of SARON-linked instruments matters most?

  1. The frequency of resets, since overnight arrears compounding passes rate changes through within the period Correct answer.
  2. The bond's listing venue
  3. The size of the issuing syndicate
  4. The issuer's country of incorporation

Explanation

Overnight arrears compounding captures rate changes almost immediately, so falling rates feed into the coupon within the current period. Structural features such as listing venue do not affect rate sensitivity.

Question 19Swiss money market and interest rate environment

What is the primary reason the Swiss market moved from TOIS to SARON as the CHF reference rate?

  1. To allow the SNB to set the rate directly
  2. To increase the number of tenors available in the fixing
  3. To align with the global shift toward transaction-based overnight risk-free rates Correct answer.
  4. To reduce the publication frequency to weekly

Explanation

The transition followed the international benchmark reform agenda, replacing quote-based IBOR-style fixings with transaction-based overnight rates. It was not driven by adding tenors or central bank rate setting.

Question 20Swiss money market and interest rate environment

Which factor is embedded in the SARON fixing but not in an unsecured interbank rate?

  1. The liquidity premium for one month
  2. The credit risk of the borrowing bank
  3. The term premium for one week
  4. The collateral quality of the repo transaction Correct answer.

Explanation

Because SARON is derived from repo trades, the rate reflects the collateral posted and is therefore secured in nature. Unsecured rates instead embed bank credit risk.

Question 21Swiss money market and interest rate environment

A client asks why a SARON-linked mortgage may show a slightly different effective cost than a fixed-rate mortgage of the same tenor. What is the most accurate explanation?

  1. SARON mortgages cannot be prepaid
  2. The floating rate resets with market conditions, so the effective cost depends on the path of future SARON fixings Correct answer.
  3. SARON mortgages always carry a higher spread because they are unsecured
  4. Fixed-rate mortgages are exempt from Swiss consumer protection rules

Explanation

A floating-rate mortgage's realised cost depends on how SARON evolves over the life of the loan plus the contractual margin. A fixed-rate loan instead locks in a single rate that embeds a term premium.

Question 22Swiss money market and interest rate environment

Which statement correctly describes the publication timing of the SARON fixing?

  1. It is published only on the last business day of each month
  2. It is published once a week on Fridays
  3. It is published in real time continuously throughout the day
  4. It is published each trading day shortly after the repo trading window closes Correct answer.

Explanation

SARON is a daily fixing computed after the relevant repo trading window and published on each trading day. It is not a continuous real-time rate nor a weekly or monthly figure.

Question 23Swiss money market and interest rate environment

What does the SNB's policy rate decision typically influence with respect to SARON?

  1. It has no relationship to SARON at all
  2. It mechanically sets the SARON fixing each morning
  3. It fixes the SARON spread embedded in floating rate notes
  4. It guides short-term CHF money market conditions, which in turn shape the level of the overnight repo rate Correct answer.

Explanation

Policy rate changes influence the supply and price of CHF liquidity and thereby the repo rate level, but SARON itself remains market-determined. Contractual spreads in notes are unaffected.

Question 24Swiss money market and interest rate environment

Which of the following best characterises the risk that a SARON-linked investor faces when rates rise sharply during a coupon period?

  1. The investor benefits because the arrears compounding captures the higher fixings within the period Correct answer.
  2. The investor is protected by a cap embedded in every SARON note
  3. The investor loses because the spread shrinks as rates rise
  4. The investor is unaffected because the coupon was fixed at period start

Explanation

In an arrears structure the daily fixings after a rate rise enter the compounding, so the coupon for that period increases. The spread itself does not change with the rate level.

Question 25Swiss money market and interest rate environment

Which term describes the practice of using the SARON fixing observed on a specific date to determine a payment for a later period?

  1. In-arrears observation
  2. Compounding
  3. In-advance observation Correct answer.
  4. Discounting

Explanation

In-advance observation uses a fixing set before the period begins, giving certainty about the rate but not reflecting the actual period's funding cost. In-arrears observation instead uses fixings during the period.

Question 26Swiss money market and interest rate environment

Which institution calculates and publishes the SARON fixing each trading day?

  1. LCH Ltd, as the central counterparty for CHF repo trades
  2. The Swiss National Bank, as part of its monetary policy operations
  3. The Swiss Bankers Association, on behalf of its member banks
  4. SIX Swiss Exchange, acting through its index and reference-rate function Correct answer.

Explanation

SARON is a transaction-based reference rate administered within the SIX group, which collects the underlying repo market data and publishes the fixing. The SNB is a participant in the repo market and a user of the rate, but it is not the administrator.

Question 27Swiss money market and interest rate environment

A CHF money market fund wants overnight secured exposure to the Swiss franc with minimal counterparty risk. Which transaction type most directly matches that objective?

  1. A purchase of a one-year Swiss Confederation money market instrument
  2. An overnight CHF repo against high-quality collateral Correct answer.
  3. A three-month CHF time deposit with a commercial bank
  4. An unsecured overnight call loan to a Swiss cantonal bank

Explanation

An overnight repo is a secured transaction: the cash provider holds collateral, which reduces counterparty exposure, and the rate on such trades feeds directly into SARON. Unsecured call money and term deposits carry unsecured bank exposure, and a one-year bill is a term instrument rather than overnight liquidity.

Question 28Swiss money market and interest rate environment

The SNB lowers its policy rate into negative territory and the CHF repo market trades persistently below zero. What is the direct consequence for compounded SARON on a floating rate note without a floor?

  1. The compounded rate is set to zero because reference rates cannot be negative
  2. The compounded rate is fixed at the last positive observation before the cut
  3. The compounded rate stays positive because the spread is added first
  4. The compounded rate becomes negative, reducing the coupon below the quoted spread Correct answer.

Explanation

SARON is a transaction-based rate and can be negative; compounding negative daily fixings produces a negative compounded rate. On a note without a floor, the coupon is the sum of that negative rate and the spread, so it can fall below the spread itself.

Question 29Swiss money market and interest rate environment

An investor holds a CHF floating rate note paying compounded SARON plus 60 bp, with daily compounding over a quarterly period. If average overnight SARON over the period is 1.20%, what coupon accrues for that quarter, ignoring day-count detail?

  1. 1.20%
  2. 0.60%
  3. 1.80% Correct answer.
  4. 2.40%

Explanation

The coupon equals the compounded reference rate plus the quoted spread, so 1.20% plus 0.60% gives 1.80% for the period. The spread is a fixed margin added on top of the reference rate rather than a multiplier of it.

Question 30Swiss money market and interest rate environment

A treasurer compares a SARON-linked loan compounded in arrears with one compounded in advance over the same observation period. Assuming identical daily fixings and no floor, how do the two accruals differ?

  1. Both produce the same accrual because the same fixings are used, only the observation window shifts Correct answer.
  2. Compounding in arrears produces a higher accrual because it captures more daily observations
  3. Compounding in advance produces a lower accrual because the spread is applied only once
  4. Compounding in advance produces a higher accrual because each fixing is known before the period starts

Explanation

With identical fixings the arithmetic compounding result is the same; the difference between the two conventions lies in which dates the observation window covers relative to the interest period, not in the size of the accrual. In practice the windows differ, so the realised amounts can diverge, but the convention itself does not mechanically raise or lower the compounded value.

Question 31SARON reference rate: methodology, calculation, and publication

What does the acronym SARON stand for in the Swiss money market context?

  1. Swiss Approved Reference Overnight Note
  2. Secured Average Rate Overnight Nominal
  3. Swiss Average Rate Overnight Correct answer.
  4. Swiss Average Rate on Overnight Collateral

Explanation

SARON is the Swiss Average Rate Overnight, the overnight reference rate administered by SIX for the Swiss franc money market. The name signals that it is an overnight (not term) average rate. It is based on transactions and quotes in the Swiss repo market.

Question 32SARON reference rate: methodology, calculation, and publication

SARON is calculated from activity in which underlying market?

  1. The Swiss franc repo market Correct answer.
  2. The SIX Swiss Exchange equity order book
  3. The Swiss government bond futures market
  4. The Swiss franc spot FX market

Explanation

SARON is derived from interest rates on repo transactions and executable quotes in the Swiss franc repo market, where cash is exchanged against collateral. It is therefore a secured, transaction-based rate. Equity, FX, and futures markets do not feed the SARON calculation.

Question 33SARON reference rate: methodology, calculation, and publication

Which administrator is responsible for calculating and publishing SARON?

  1. SIX Correct answer.
  2. The Swiss National Bank
  3. The European Central Bank
  4. LSEG Data & Analytics

Explanation

SIX calculates and publishes SARON as part of its Swiss reference rate family. The Swiss National Bank uses SARON as its policy rate target but does not administer the fixing. The ECB and LSEG administer other, non-Swiss benchmarks.

Question 34SARON reference rate: methodology, calculation, and publication

On which basis does SARON represent the overnight franc rate?

  1. A volume-weighted average of secured repo transactions and quotes Correct answer.
  2. A simple arithmetic mean of unsecured interbank loans
  3. A median of central bank deposit rates
  4. A survey of bank treasurers' expectations

Explanation

SARON is a volume-weighted average computed from secured repo transactions and executable quotes in the Swiss franc repo market. Weighting by volume makes it more representative of actual trading activity than a simple average. It is transaction-based rather than survey-based.

Question 35SARON reference rate: methodology, calculation, and publication

How frequently is SARON published during a normal trading day?

  1. Once only, at the close of the London market
  2. Weekly, every Friday
  3. Monthly, on the last business day
  4. At regular intraday intervals, with a final end-of-day fixing Correct answer.

Explanation

SARON is published at regular intraday intervals during the trading day, and a final end-of-day value is also published. This intraday frequency distinguishes it from rates fixed only once per day. The final value is the one most commonly referenced in contracts.

Question 36SARON reference rate: methodology, calculation, and publication

Which day-count convention is standard for SARON-based interest accrual?

  1. 30/360
  2. Actual/360
  3. Actual/365 (fixed) Correct answer.
  4. Actual/Actual (ICMA)

Explanation

SARON-linked contracts typically use the Actual/365 (fixed) convention, reflecting Swiss money market practice. Actual/360 is common in USD markets, and 30/360 is used for some bond coupons. Using the wrong convention changes the accrued interest materially.

Question 37SARON reference rate: methodology, calculation, and publication

Why is SARON described as a 'secured' rate?

  1. Because repo transactions are collateralised Correct answer.
  2. Because participants post margin deposits
  3. Because it is backed by the Swiss government
  4. Because the SNB guarantees the rate

Explanation

SARON is secured because the underlying repo transactions are collateralised, meaning cash is lent against securities. This reduces counterparty credit risk relative to unsecured interbank lending. The SNB does not guarantee the rate itself.

Question 38SARON reference rate: methodology, calculation, and publication

A loan contract references 'SARON compounded in arrears' for a three-month interest period. How is the rate for the period determined?

  1. By fixing SARON once on the first day of the period
  2. By using the SNB policy rate on the last day
  3. By averaging monthly SARON fixings and applying them in advance
  4. By compounding the daily SARON fixings over the period, applied at period end Correct answer.

Explanation

Compounding in arrears takes each daily SARON fixing, compounds them across the interest period, and applies the resulting rate at the end of the period. This approach removes the need to know the rate in advance. It is the standard replacement for term fixings in loan contracts.

Question 39SARON reference rate: methodology, calculation, and publication

Which statement best describes the role of executable quotes in the SARON methodology?

  1. They replace transactions entirely on all days
  2. They supplement transactions where trading volume is thin Correct answer.
  3. They are excluded because only settled trades count
  4. They are used only for the weekly fixing

Explanation

SARON methodology incorporates executable quotes to keep the rate robust when transaction volume is low. Transactions remain the primary input, with quotes providing supplementary information. This design helps avoid gaps in the published rate.

Question 40SARON reference rate: methodology, calculation, and publication

An analyst computes accrued interest on a SARON-linked deposit of CHF 10,000,000 at 1.20% for 90 days using Actual/365 (fixed). Which amount is closest?

  1. CHF 29,918
  2. CHF 29,589 Correct answer.
  3. CHF 3,600
  4. CHF 30,000

Explanation

Accrued interest equals principal × rate × days/365, so 10,000,000 × 0.012 × 90/365 ≈ CHF 29,589. Using 360 days instead would give about CHF 30,000, which is the common error. The fixed 365 denominator is the Swiss market convention.

Question 41SARON reference rate: methodology, calculation, and publication

Which feature distinguishes SARON from a term reference rate such as a three-month rate?

  1. SARON is set by the SNB each morning
  2. SARON is fixed once per quarter
  3. SARON includes a bank credit spread
  4. SARON is an overnight rate that must be compounded for longer periods Correct answer.

Explanation

SARON is an overnight rate, so any longer interest period is built by compounding daily fixings. Term rates instead fix once at the start of the period. This is why contracts transitioned to compounded-in-arrears structures.

Question 42SARON reference rate: methodology, calculation, and publication

Why did Swiss franc contracts migrate from LIBOR-style fixings to SARON?

  1. To base contracts on transaction-based secured rates after benchmark reform Correct answer.
  2. To reduce the number of publication days
  3. To increase the credit spread embedded in the rate
  4. To align the franc with the euro overnight rate

Explanation

Global benchmark reform replaced LIBOR-style rates, which relied partly on expert judgement, with transaction-based alternatives. SARON offered a secured, transaction-driven franc benchmark. This reduced reliance on submissions and improved robustness.

Question 43SARON reference rate: methodology, calculation, and publication

What is the SNB's relationship to SARON?

  1. The SNB uses SARON as its policy rate target but does not administer it Correct answer.
  2. The SNB calculates and publishes SARON daily
  3. The SNB has no role related to SARON
  4. The SNB sets SARON by decree each morning

Explanation

The SNB conducts monetary policy by targeting SARON, aiming to keep it within a corridor around the policy rate. Administration and calculation remain with SIX. This separation of policy target from benchmark administration is important.

Question 44SARON reference rate: methodology, calculation, and publication

Which best describes the SNB's implementation of SARON targeting?

  1. A ceiling set by the government
  2. A weekly auction of the overnight rate
  3. A fixed rate imposed on all repo transactions
  4. A corridor around the policy rate, influenced by the rate on sight deposits Correct answer.

Explanation

The SNB guides SARON toward its policy rate using a corridor and the remuneration of sight deposits at the central bank. Market repo activity then settles near the target. The rate is not imposed directly on transactions.

Question 45SARON reference rate: methodology, calculation, and publication

A treasurer must value a SARON-linked instrument mid-period. Which input is most appropriate for discounting the remaining cash flows?

  1. The LIBOR franc fixing from the prior year
  2. The SNB policy rate exactly
  3. The latest published SARON fixing compounded forward or an OIS curve Correct answer.
  4. The SIX equity index return

Explanation

Valuation of SARON-linked cash flows uses the latest published fixings for the elapsed period and an overnight index swap curve for projecting and discounting the remainder. Stale LIBOR fixings and unrelated market data are inappropriate. The policy rate alone does not capture the market curve.

Question 46SARON reference rate: methodology, calculation, and publication

How does the methodology treat days on which no repo transactions occur in the franc market?

  1. Executable quotes and a defined fallback procedure keep the rate published Correct answer.
  2. No SARON value is published that day
  3. The previous week's average is republished
  4. The SNB supplies a substitute rate

Explanation

The methodology includes executable quotes and fallback procedures so that a SARON value can still be published when transactions are sparse. This ensures continuity of the benchmark. Contracts relying on SARON therefore continue to function.

Question 47SARON reference rate: methodology, calculation, and publication

Which statement about SARON's publication time is accurate?

  1. The final value is released only to the SNB
  2. The final value is revised the following month
  3. The final value is published before the market opens
  4. The final end-of-day value is published after the trading day and is the value most contracts reference Correct answer.

Explanation

The final end-of-day SARON value is published after the trading day concludes and is the value typically referenced in contracts. Intraday values are published earlier but are not the contractual final fixing. The final value is not revised a month later.

Question 48SARON reference rate: methodology, calculation, and publication

Which risk does compounding SARON in arrears introduce for a borrower compared with a term fixing?

  1. Exposure to equity market movements
  2. A fixed rate known at the start of the period
  3. Uncertainty about the rate until the period ends Correct answer.
  4. A credit spread that rises over time

Explanation

Because the compounded rate is only known at period end, the borrower does not know the interest amount in advance. This is the main practical difference from a term fixing. It is a timing and uncertainty risk, not an equity risk.

Question 49SARON reference rate: methodology, calculation, and publication

An analyst argues that SARON should be treated as a risk-free rate for discounting. Which is the most accurate assessment?

  1. It is a secured overnight rate that approximates a near-risk-free franc rate but is not identical to an OIS curve Correct answer.
  2. It is a credit-sensitive unsecured rate
  3. It is exactly equal to the OIS curve at all tenors
  4. It cannot be used for discounting at all

Explanation

SARON is secured and overnight, so it is close to a near-risk-free franc rate, but the OIS curve reflects expectations of future overnight rates and term premia. Using a single overnight fixing as a full discount curve would be imprecise. Analysts therefore build an OIS curve rather than equating SARON with it.

Question 50SARON reference rate: methodology, calculation, and publication

A contract specifies a fallback from a discontinued franc term rate to SARON compounded in arrears. Which design element is most important to specify?

  1. The equity index to be used
  2. The colour of the confirmation
  3. The issuer's credit rating
  4. The lookback period and observation shift convention Correct answer.

Explanation

Fallback drafting must specify the lookback period, observation shift, and compounding method so that the rate is calculated consistently and deterministically. These conventions affect the timing of observations and the resulting interest amount. Non-financial details such as confirmation colour are irrelevant.