Question 1

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:

Accepted Answer

A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit. 
A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit. B

Question 2

Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.

Accepted Answer

A) True 
 B)False  False

Question 3

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:

Accepted Answer

A)  sell an interest rate futures contract of a similar maturity to the loan. 
B)  buy an interest rate futures contract of a similar maturity to the loan. 
C)  swap the adjustable rate loan for another of a different maturity. 
D)  none of the above 
A)  sell an interest rate futures contract of a similar maturity to the loan. 
B)  buy an interest rate futures contract of a similar maturity to the loan. 
C)  swap the adjustable rate loan for another of a different maturity. 
D)  none of the above A

Question 4

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. Which strategy (strategies) will eliminate credit risk?

Accepted Answer

A)  Strategy #1 
B)  Strategy #2 
C)  Strategy #3 
D)  Strategies #1 and #2 
A)  Strategy #1 
B)  Strategy #2 
C)  Strategy #3 
D)  Strategies #1 and #2

Question 5

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. After the fact, under which set of circumstances would you prefer strategy #2? (Assume your firm is borrowing money.)

Accepted Answer

A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment. 
A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment.

Question 6

One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity, currency of composition, and fixed/floating pricing.

Accepted Answer

A) True 
 B)False

Question 7

The single largest interest rate risk of a firm is:

Accepted Answer

A)  interest sensitive securities. 
B)  debt service. 
C)  dividend payments. 
D)  accounts payable. 
A)  interest sensitive securities. 
B)  debt service. 
C)  dividend payments. 
D)  accounts payable.

Question 8

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

Accepted Answer

With exchange-traded derivatives, the ex

Question 9

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is: (Assume your firm is borrowing money.)

Accepted Answer

A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above 
A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above

Question 10

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

Accepted Answer

A)  Credit risk; Interest rate risk 
B)  Repricing risk; Credit risk 
C)  Interest rate risk; Credit risk 
D)  Credit risk; Repricing risk 
A)  Credit risk; Interest rate risk 
B)  Repricing risk; Credit risk 
C)  Interest rate risk; Credit risk 
D)  Credit risk; Repricing risk

Question 11

The real exposure of an interest or currency swap is not the total notional principal, but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.

Accepted Answer

A) True 
 B)False

Question 12

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. After the fact, under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)

Accepted Answer

A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment. 
A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment.

Question 13

Individual borrowers - whether they be governments or companies - possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT:

Accepted Answer

A)  cost of capital. 
B)  access to capital. 
C)  credit risk premium. 
D)  risk-free rate. 
A)  cost of capital. 
B)  access to capital. 
C)  credit risk premium. 
D)  risk-free rate.

Question 14

An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an:

Accepted Answer

A)  forward rate agreement. 
B)  interest rate future. 
C)  interest rate swap. 
D)  none of the above 
A)  forward rate agreement. 
B)  interest rate future. 
C)  interest rate swap. 
D)  none of the above

Question 15

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

Accepted Answer

A)  currency swap. 
B)  forward swap. 
C)  interest rate swap. 
D)  none of the above 
A)  currency swap. 
B)  forward swap. 
C)  interest rate swap. 
D)  none of the above

Question 16

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to:

Accepted Answer

A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate. 
A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate.

Question 17

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. Choosing strategy #2 will:

Accepted Answer

A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period. 
A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period.

Question 18

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going down, the position outcome would be:

Accepted Answer

A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit. 
A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit.

Question 19

A/an ________ is a contract to lock in today interest rates over a given period of time.

Accepted Answer

A)  forward rate agreement 
B)  interest rate future 
C)  interest rate swap 
D)  none of the above 
A)  forward rate agreement 
B)  interest rate future 
C)  interest rate swap 
D)  none of the above

Question 20

A firm entering into a currency or interest rate swap agreement holds no responsibility for the timely servicing of its own debt obligations since that responsibility now is born by the second party to the contract.

Accepted Answer

A) True 
 B)False

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:

Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:

One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity, currency of composition, and fixed/floating pricing.

The single largest interest rate risk of a firm is:

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.

The real exposure of an interest or currency swap is not the total notional principal, but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.

Individual borrowers - whether they be governments or companies - possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT:

An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an:

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to:

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going down, the position outcome would be:

A/an ________ is a contract to lock in today interest rates over a given period of time.

A firm entering into a currency or interest rate swap agreement holds no responsibility for the timely servicing of its own debt obligations since that responsibility now is born by the second party to the contract.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

Exam 8: Interest Risk and Swaps

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:

Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:

One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity, currency of composition, and fixed/floating pricing.

The single largest interest rate risk of a firm is:

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

The real exposure of an interest or currency swap is not the total notional principal, but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.

Individual borrowers - whether they be governments or companies - possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT:

An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an:

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to:

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going down, the position outcome would be:

A/an ________ is a contract to lock in today interest rates over a given period of time.

A firm entering into a currency or interest rate swap agreement holds no responsibility for the timely servicing of its own debt obligations since that responsibility now is born by the second party to the contract.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.