Question 1

If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments.

Accepted Answer

A) fixed-rate; floating-rate 
B) fixed-rate euro; fixed-rate dollar 
C) stock dividend; fixed-rate 
D) stock dividend; floating-rate 
A) fixed-rate; floating-rate 
B) fixed-rate euro; fixed-rate dollar 
C) stock dividend; fixed-rate 
D) stock dividend; floating-rate

Question 2

The most common proxy for the benchmark rate from which a floating-rate payment is determined is the prime rate.

Accepted Answer

A) True 
 B)False

Question 3

Systemic risk is the risk that a firm involved in an interest rate swap may not meet its payment obligations.

Accepted Answer

A) True 
 B)False

Question 4

The same types of risks that apply to interest rate swaps may also apply to currency swaps, except that currency swaps are not subject to basis risk.

Accepted Answer

A) True 
 B)False

Question 5

A rate-capped swap may limit the fixed-rate payer's ability to effectively hedge against interest rate risk.

Accepted Answer

A) True 
 B)False

Question 6

An arrangement that enables firms to exchange currencies at periodic intervals is called a(n)

Accepted Answer

A) currency swap. 
B) interest rate swap. 
C) swap exchange. 
D) Eurobond swap. 
A) currency swap. 
B) interest rate swap. 
C) swap exchange. 
D) Eurobond swap.

Question 7

Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns.

Accepted Answer

A) increase; increase 
B) increase; reduce 
C) reduce; increase 
D) reduce; reduce 
A) increase; increase 
B) increase; reduce 
C) reduce; increase 
D) reduce; reduce

Question 8

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

Accepted Answer

A) purchased an interest rate cap. 
B) sold an interest rate cap. 
C) purchased an interest rate floor. 
D) sold an interest rate floor. 
A) purchased an interest rate cap. 
B) sold an interest rate cap. 
C) purchased an interest rate floor. 
D) sold an interest rate floor.

Question 9

The London Interbank Offer Rate (LIBOR)varies among currencies.

Accepted Answer

A) True 
 B)False

Question 10

The option on a callable swap would most likely be exercised if interest rates

Accepted Answer

A) rise. 
B) fall. 
C) remain constant. 
D) remain somewhat stable. 
A) rise. 
B) fall. 
C) remain constant. 
D) remain somewhat stable.

Question 11

In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions.

Accepted Answer

A) many; lower 
B) many; higher 
C) few; lower 
D) few; higher 
A) many; lower 
B) many; higher 
C) few; lower 
D) few; higher

Question 12

The advantage of a rate-capped interest rate swap (relative to a plain vanilla swap)to the party exchanging fixed payments for floating payments is that

Accepted Answer

A) there is a minimum limit set on the interest rate payments received. 
B) there is a maximum limit set on the interest payments it will provide. 
C) it receives an up-front fee. 
D) None of these are correct. 
A) there is a minimum limit set on the interest rate payments received. 
B) there is a maximum limit set on the interest payments it will provide. 
C) it receives an up-front fee. 
D) None of these are correct.

Question 13

____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party.

Accepted Answer

A) Basis 
B) Credit 
C) Sovereign 
D) None of these are correct. 
A) Basis 
B) Credit 
C) Sovereign 
D) None of these are correct.

Question 14

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

Accepted Answer

A) purchased an interest rate cap. 
B) sold an interest rate cap. 
C) purchased an interest rate floor. 
D) sold an interest rate floor. 
A) purchased an interest rate cap. 
B) sold an interest rate cap. 
C) purchased an interest rate floor. 
D) sold an interest rate floor.

Question 15

Swap transactions are only used to

Accepted Answer

A) hedge against upward interest rate movements. 
B) hedge against downward interest rate movements. 
C) speculate. 
D) None of these are correct. 
A) hedge against upward interest rate movements. 
B) hedge against downward interest rate movements. 
C) speculate. 
D) None of these are correct.

Question 16

Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps.

Accepted Answer

A) caps 
B) floors 
C) collars 
D) All of these are correct. 
A) caps 
B) floors 
C) collars 
D) All of these are correct.

Question 17

A(n)____ swap allows the party making fixed payments to extend the swap period.

Accepted Answer

A) forward 
B) extendable 
C) callable 
D) putable 
A) forward 
B) extendable 
C) callable 
D) putable

Question 18

Which of the following is NOT a typical provision of an interest rate swap?

Accepted Answer

A) the notional principal value to which the interest rates are applied to determine the interest payments involved 
B) the fixed interest rate 
C) the formula and type of index used to determine the floating interest rate 
D) the underwriter of the bond 
E) All of these are provisions of an interest rate swap. 
A) the notional principal value to which the interest rates are applied to determine the interest payments involved 
B) the fixed interest rate 
C) the formula and type of index used to determine the floating interest rate 
D) the underwriter of the bond 
E) All of these are provisions of an interest rate swap.

Question 19

In a ____, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract.

Accepted Answer

A) default option contract 
B) default futures contract 
C) bankruptcy contract 
D) credit default swap 
A) default option contract 
B) default futures contract 
C) bankruptcy contract 
D) credit default swap

Question 20

An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.

Accepted Answer

A) True 
 B)False

Exam 15: Swap Markets

If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments.

The most common proxy for the benchmark rate from which a floating-rate payment is determined is the prime rate.

Systemic risk is the risk that a firm involved in an interest rate swap may not meet its payment obligations.

The same types of risks that apply to interest rate swaps may also apply to currency swaps, except that currency swaps are not subject to basis risk.

A rate-capped swap may limit the fixed-rate payer's ability to effectively hedge against interest rate risk.

An arrangement that enables firms to exchange currencies at periodic intervals is called a(n)

Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns.

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

The London Interbank Offer Rate (LIBOR)varies among currencies.

The option on a callable swap would most likely be exercised if interest rates

In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions.

The advantage of a rate-capped interest rate swap (relative to a plain vanilla swap)to the party exchanging fixed payments for floating payments is that

____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party.

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

Swap transactions are only used to

Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps.

A(n)____ swap allows the party making fixed payments to extend the swap period.

Which of the following is NOT a typical provision of an interest rate swap?

In a ____, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract.

An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Pension Fund Operations

Filters

If a firm negotiates a plain vanilla swap, it will provide payments in exchange for payments.

Financial institutions primarily use interest rate swaps in a way that will exposure to interest rate risk and potential returns.

In a period when interest rates are expected to rise, institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be under these conditions.