Question 1

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 the above 
A)  hedge against upward interest rate movements. 
B)  hedge against downward interest rate movements. 
C)  speculate. 
D)  none of the above

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterpartyis likely adversely affected by ____ interest rates.

Accepted Answer

A)  increase; increasing 
B)  increase; declining 
C)  decrease; declining 
D)  decrease; increasing 
E)  none of the above 
A)  increase; increasing 
B)  increase; declining 
C)  decrease; declining 
D)  decrease; increasing 
E)  none of the above

Question 5

Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Averageeachyear over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent over the year, Hewitt will

Accepted Answer

A)  have to make a payment of $70,000. 
B)  have to make a payment of $90,000. 
C)  receive a payment of $70,000. 
D)  receive a payment of $90,000. 
E)  none of the above 
A)  have to make a payment of $70,000. 
B)  have to make a payment of $90,000. 
C)  receive a payment of $70,000. 
D)  receive a payment of $90,000. 
E)  none of the above

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

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

Accepted Answer

A)  coupon rate on existing bonds. 
B)  stock dividend rate based on a U.S. stock index. 
C)  London Interbank Offer Rate (LIBOR). 
D)  Treasury bond yield. 
A)  coupon rate on existing bonds. 
B)  stock dividend rate based on a U.S. stock index. 
C)  London Interbank Offer Rate (LIBOR). 
D)  Treasury bond yield.

Question 8

Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself.

Accepted Answer

A) True 
 B)False

Question 9

Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ____ than ____ and therefore were adversely affected by ____ interestrates.

Accepted Answer

A)  assets; liabilities; increasing 
B)  liabilities; assets; decreasing 
C)  liabilities; assets; increasing 
D)  none of the above 
A)  assets; liabilities; increasing 
B)  liabilities; assets; decreasing 
C)  liabilities; assets; increasing 
D)  none of the above

Question 10

____ 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 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

Which of the following statements is incorrect?

Accepted Answer

A)  Interest rate swaps are sometimes used by financial institutions and other firms for speculative purposes. 
B)  A primary reason for the popularity of interest rate swaps is the existence of market imperfections. 
C)  Swaps are necessary for some financial institutions to obtain the maturities or rate sensitivities on funds that they desire. 
D)  Most financial institutions that anticipate that interest rates will move in an unfavorable direction do not hedge their positions. 
A)  Interest rate swaps are sometimes used by financial institutions and other firms for speculative purposes. 
B)  A primary reason for the popularity of interest rate swaps is the existence of market imperfections. 
C)  Swaps are necessary for some financial institutions to obtain the maturities or rate sensitivities on funds that they desire. 
D)  Most financial institutions that anticipate that interest rates will move in an unfavorable direction do not hedge their positions.

Question 13

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

Accepted Answer

A)  can match up two parties but cannot take a position in the swap. 
B)  can match up two parties or can take a position in the swap. 
C)  cannot match up two parties and cannot take a position in the swap. 
D)  cannot match up two parties but can take a position in the swap. 
A)  can match up two parties but cannot take a position in the swap. 
B)  can match up two parties or can take a position in the swap. 
C)  cannot match up two parties and cannot take a position in the swap. 
D)  cannot match up two parties but can take a position in the swap.

Question 14

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 15

Interest rate swaps are rarely used by companies that issue bonds.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A)  plain vanilla 
B)  zero-coupon-for-floating 
C)  forward 
D)  seasoned vanilla 
E)  putable 
A)  plain vanilla 
B)  zero-coupon-for-floating 
C)  forward 
D)  seasoned vanilla 
E)  putable

Question 17

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 18

Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a rate-capped swap, its ____ payments will be capped, and it will ____anup-front premium in exchange for the cap.

Accepted Answer

A)  outflow; receive 
B)  outflow; pay 
C)  inflow; pay 
D)  inflow; receive 
A)  outflow; receive 
B)  outflow; pay 
C)  inflow; pay 
D)  inflow; receive

Question 19

Which of the following is not a reason why financial institutions engage in interest rate swaps?

Accepted Answer

A)  to reduce interest rate risk 
B)  to act as an intermediary 
C)  to act as a dealer in swaps 
D)  All of the above are reasons why financial institutions engage in swaps. 
A)  to reduce interest rate risk 
B)  to act as an intermediary 
C)  to act as a dealer in swaps 
D)  All of the above are reasons why financial institutions engage in swaps.

Exam 15: Swap Markets

Swap transactions are only used to

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

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.

If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterpartyis likely adversely affected by ____ interest rates.

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

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

Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself.

Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ____ than ____ and therefore were adversely affected by ____ interestrates.

____ swap allows the party making fixed payments to extend the swap period.

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.

Which of the following statements is incorrect?

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

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

Interest rate swaps are rarely used by companies that issue bonds.

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

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

Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a rate-capped swap, its ____ payments will be capped, and it will ____anup-front premium in exchange for the cap.

Which of the following is not a reason why financial institutions engage in interest rate swaps?

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

If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ; the counterpartyis likely adversely affected by interest rates.

Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive than and therefore were adversely affected by interestrates.

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.

Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a rate-capped swap, its payments will be capped, and it will anup-front premium in exchange for the cap.