Question 1

A common maturity of a credit default swap contract is:

Accepted Answer

A)  one month 
B)  three months 
C)  five years 
D)  25 years 
A)  one month 
B)  three months 
C)  five years 
D)  25 years C

Question 2

Savings institutions participate in the swap market primarily to

Accepted Answer

A)  serve as an intermediary by matching up two parties in a swap. 
B)  serve as a dealer by taking the counterparty position in a swap. 
C)  reduce interest rate risk. 
D)  none of the above 
A)  serve as an intermediary by matching up two parties in a swap. 
B)  serve as a dealer by taking the counterparty position in a swap. 
C)  reduce interest rate risk. 
D)  none of the above C

Question 3

An interest rate collar involves the ____ of an interest rate cap and the simultaneous ____ of an interest rate floor.

Accepted Answer

A)  sale; sale 
B)  sale; purchase 
C)  purchase; purchase 
D)  purchase; sale 
A)  sale; sale 
B)  sale; purchase 
C)  purchase; purchase 
D)  purchase; sale D

Question 4

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 5

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 6

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

Accepted Answer

A)  vanilla 
B)  LIBOR 
C)  programmed 
D)  notional 
A)  vanilla 
B)  LIBOR 
C)  programmed 
D)  notional

Question 7

An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments.

Accepted Answer

A)  callable swap 
B)  putable swap 
C)  zero-coupon for floating swap 
D)  forward swap 
A)  callable swap 
B)  putable swap 
C)  zero-coupon for floating swap 
D)  forward swap

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

A financial institution may participate in the swaps markets by:

Accepted Answer

A)  serving as an intermediary by matching up parties that wish to engage in a swap. 
B)  engaging in swaps to reduce interest rate risk. 
C)  assuming the credit risk involved in a swap by guaranteeing that the payments will be made. 
D)  A and B 
A)  serving as an intermediary by matching up parties that wish to engage in a swap. 
B)  engaging in swaps to reduce interest rate risk. 
C)  assuming the credit risk involved in a swap by guaranteeing that the payments will be made. 
D)  A and B

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

An equity swap involves the exchange of

Accepted Answer

A)  preferred stock for common stock. 
B)  interest payments for an equity position in the counterparty's firm. 
C)  interest payments for payments linked to the degree of change in a stock index. 
D)  interest payments for newly issued stock by financial institutions. 
A)  preferred stock for common stock. 
B)  interest payments for an equity position in the counterparty's firm. 
C)  interest payments for payments linked to the degree of change in a stock index. 
D)  interest payments for newly issued stock by financial institutions.

Question 12

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 firmhas

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 13

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 14

Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as theindex representing the market interest rate. LIBOR is 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The total payments received (or paid) by Lizard, including the initial fee, are $____.

Accepted Answer

A)  500,000 
B)  -500,000 
C)  -1,500,000 
D)  1,500,000 
E)  none of the above 
A)  500,000 
B)  -500,000 
C)  -1,500,000 
D)  1,500,000 
E)  none of the above

Question 15

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 perfecttandem with its cost of deposits, this reflects

Accepted Answer

A)  sovereign risk. 
B)  basis risk. 
C)  credit risk. 
D)  none of the above 
A)  sovereign risk. 
B)  basis risk. 
C)  credit risk. 
D)  none of the above

Question 16

An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate.

Accepted Answer

A) True 
 B)False

Question 17

The option on a putable 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 18

The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates.

Accepted Answer

A)  favorably; rising 
B)  favorably; falling 
C)  adversely; rising 
D)  adversely; falling 
A)  favorably; rising 
B)  favorably; falling 
C)  adversely; rising 
D)  adversely; falling

Question 19

Financial institutions with ____ interest rate-sensitive liabilities than assets are ____ affected by rising interest rates.

Accepted Answer

A)  more; adversely 
B)  fewer; adversely 
C)  more; favorably 
D)  none of the above 
A)  more; adversely 
B)  fewer; adversely 
C)  more; favorably 
D)  none of the above

Question 20

A plain vanilla swap enables firms to exchange ____ for ____.

Accepted Answer

A)  fixed-rate payments; floating-rate payments 
B)  a high interest rate foreign currency; a low interest rate foreign currency 
C)  a low interest rate foreign currency; a high interest rate foreign currency 
D)  bonds; stocks that pay dividends 
A)  fixed-rate payments; floating-rate payments 
B)  a high interest rate foreign currency; a low interest rate foreign currency 
C)  a low interest rate foreign currency; a high interest rate foreign currency 
D)  bonds; stocks that pay dividends

Exam 15: Swap Markets

A common maturity of a credit default swap contract is:

Savings institutions participate in the swap market primarily to

An interest rate collar involves the ____ of an interest rate cap and the simultaneous ____ of an interest rate floor.

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.

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

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

An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments.

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

A financial institution may participate in the swaps markets by:

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

An equity swap involves the exchange of

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 firmhas

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

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 perfecttandem with its cost of deposits, this reflects

An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate.

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

The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates.

Financial institutions with ____ interest rate-sensitive liabilities than assets are ____ affected by rising interest rates.

A plain vanilla swap enables firms to exchange ____ for ____.

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 Operations

Pension Fund Operations

Filters

An interest rate collar involves the of an interest rate cap and the simultaneous of an interest rate floor.

The typical purchaser of an interest rate cap is a financial institution that is affected by interest rates.

Financial institutions with interest rate-sensitive liabilities than assets are affected by rising interest rates.

A plain vanilla swap enables firms to exchange for .