Exam 15: Swap Markets

Assume a U.S. savings institution funds its fixed-rate mortgages by attracting short-term deposits. If it engages in an interest rate swap, but the index on the swap does not move in perfect tandem with its cost of deposits, this reflects

A(n)____ swap provides the party making the floating-rate payments with a right to terminate the swap.

A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped.

AIG's financial problems during the credit crisis were attributed to

A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately.

Interest rate floors are commonly used to hedge against lower interest rates.

Which of the following statements is incorrect?

A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time.

A firm is involved in an agreement whereby it receives payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has

An interest rate swap agreement indicates the ____ value, which represents the principal amount to which interest rates are applied to determine the interest payments involved.

The most likely users of plain vanilla swaps would be

After the credit crisis, new rules and regulations were issued to reform the swap markets. Which of the following is NOT one of the requirements of these new rules and regulations?

When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it

Savings institutions participate in the swap market primarily to

A putable swap gives the party making the fixed-rate payments the right to terminate the swap.

In a swap arrangement, the most common index used for floating-rate payments is the

An equity swap involves the exchange of

If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments.

A financial institution may participate in the swaps markets by

The Bank of Moronto has negotiated a plain vanilla swap whereby it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million?