Bonds backed by federally guaranteed student loans are subject to greater short-term basis risk because of a mismatch in the way the interest rate on the bonds is calculated compared to the way the Department of Education sets interest on the underlying loans that flow into bond trusts, according to a report released by Fitch Ratings yesterday.

A highlight of the 10-page report, “Quantifying Basis Risk in U.S. FFELP Student Loan ABS,” is that the basis risk arises not only from the different indexes used to set the two interest rates, but also from the method of determining the rates.

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