Question 1

A(n)_________________________ is a new swap agreement which offsets the original interest rate swap contract.

Accepted Answer

The answer of A(n)_________________________ is a new swap agreement which...

Question 2

Basis risk is the difference in the interest rates (or prices)of the same security between the cash market and the futures market.

Accepted Answer

A) True 
 B)False

Question 3

A call option on Eurodollar deposit futures is most likely to be used by a bank to:

Accepted Answer

A) protect the value of its fixed-rate loans and securities. 
B) offset a negative interest-sensitive gap. 
C) offset a positive duration gap. 
D) offset a negative duration gap. 
E) speculate on the rising interest rates. 
A) protect the value of its fixed-rate loans and securities. 
B) offset a negative interest-sensitive gap. 
C) offset a positive duration gap. 
D) offset a negative duration gap. 
E) speculate on the rising interest rates.

Question 4

A financial institution with a positive interest-sensitive gap and anticipating falling interest rates could protect against loss by covering the gap with a long hedge.

Accepted Answer

A) True 
 B)False

Question 5

In an interest rate swap agreement,__________________ reduces the default risk.This is where the swap parties exchange only the net difference between the interest payments owed.

Accepted Answer

The answer of In an interest rate swap agreement,__________________ reduces...

Question 6

A(n)_________________________ allows the holder the right to either sell securities to another investor (put)or buy securities from another investor (call)at a set price before the expiration date.

Accepted Answer

The answer of A(n)_________________________ allows the holder the right to...

Question 7

The gain or loss to a bank from the use of a financial futures contract depends upon:

Accepted Answer

A) the duration of the underlying security named in the futures contract. 
B) the initial futures price. 
C) the change expected in interest rates. 
D) All of the options are correct. 
E) None of the options are correct. 
A) the duration of the underlying security named in the futures contract. 
B) the initial futures price. 
C) the change expected in interest rates. 
D) All of the options are correct. 
E) None of the options are correct.

Question 8

Eurodollar contracts are quoted using:

Accepted Answer

A) an index price which is 100 minus the yield on a bank discount basis. 
B) an index price which is 100 minus the yield on a ten-year U.S.treasuries. 
C) interest rate derived from one-month federal funds futures. 
D) interest rate derived from three-month U.S.T-bill futures. 
E) interest rate derived from one-year U.S.T-bond futures. 
A) an index price which is 100 minus the yield on a bank discount basis. 
B) an index price which is 100 minus the yield on a ten-year U.S.treasuries. 
C) interest rate derived from one-month federal funds futures. 
D) interest rate derived from three-month U.S.T-bill futures. 
E) interest rate derived from one-year U.S.T-bond futures.

Question 9

In an interest-rate swap,the principal amount of the loan,usually called the ________________________,is not exchanged.

Accepted Answer

The answer of In an interest-rate swap,the principal amount of...

Question 10

A futures contract on a 30-day Eurodollar time deposit is currently selling at an IMM index of 95.75 percent.The IMM index on a 30-day Eurodollar time deposit for immediate delivery is 95.10 percent.What is the basis?

Accepted Answer

A) 65 basis points 
B) -65 basis points 
C) 650 basis points 
D) 850 basis points 
E) There is no basis risk on this contract 
A) 65 basis points 
B) -65 basis points 
C) 650 basis points 
D) 850 basis points 
E) There is no basis risk on this contract

Question 11

Suppose a $100,000 T-Bond futures contract whose underlying's duration is 9 years and has a current market price of $98,750.Market interest rates are 6 percent today but are expected to rise to 7.5 percent.What is the expected change in this futures contract's market price as a result of this change in interest rates?

Accepted Answer

A) $12,577 
B) -$12,577 
C) $62,883 
D) -$62,883 
E) None of the options are correct 
A) $12,577 
B) -$12,577 
C) $62,883 
D) -$62,883 
E) None of the options are correct

Question 12

Assume that two firms,one considered a high credit risk (HCR)and the other a low credit risk (LCR),are considering an interest rate swap.Each can borrow at the following rates: $\begin{array}{llcc}
  \quad\quad\text { Fixed Rate } & \quad\text {  Variable Rate }  \
 \text { LCR } &8\%&5\%\
 \text {  HCR } &12\%&7\%\
\end{array}$

An interest rate swap would be beneficial to both parties if:

Accepted Answer

A) the LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate. 
B) the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate. 
C) both firms want to borrow at the variable rate. 
D) both firms want to borrow at the fixed rate. 
E) an interest rate swap would be never beneficial in this situation. 
A) the LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate. 
B) the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate. 
C) both firms want to borrow at the variable rate. 
D) both firms want to borrow at the fixed rate. 
E) an interest rate swap would be never beneficial in this situation.

Question 13

Suppose a Eurodollar time deposit futures contract whose underlying's duration is 0.5 years and has a current market price of $950,000.Market interest rates are 8.5 percent and are expected to fall to 7.5 percent.What is the expected change in this futures contract's market price as a result of this change in interest rates?

Accepted Answer

A) $4,378 
B) -$4,378 
C) $30,645 
D) -$30,645 
E) None of the options are correct 
A) $4,378 
B) -$4,378 
C) $30,645 
D) -$30,645 
E) None of the options are correct

Question 14

A bank that uses a short hedge is most likely:

Accepted Answer

A) trying to avoid higher borrowing costs. 
B) trying to avoid declining asset values. 
C) trying to avoid lower than expected yields from loans and securities. 
D) trying to avoid higher borrowing costs or trying to avoid declining asset values. 
E) trying to offset a negative duration gap. 
A) trying to avoid higher borrowing costs. 
B) trying to avoid declining asset values. 
C) trying to avoid lower than expected yields from loans and securities. 
D) trying to avoid higher borrowing costs or trying to avoid declining asset values. 
E) trying to offset a negative duration gap.

Question 15

_______ is the spread between the cash price and futures price of an underlying asset.

Accepted Answer

The answer of _______ is the spread between the cash...

Question 16

A buyer of a call option on fixed-income securities is most likely to:

Accepted Answer

A) exercise the option if interest rates rise. 
B) let the option expire if the interest rates fall. 
C) exercise the option if interest rates fall. 
D) exercise the option if interest rates remain constant. 
E) buy a put option also on the same securities. 
A) exercise the option if interest rates rise. 
B) let the option expire if the interest rates fall. 
C) exercise the option if interest rates fall. 
D) exercise the option if interest rates remain constant. 
E) buy a put option also on the same securities.

Question 17

The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors):

Accepted Answer

A) the relative duration of bank assets and liabilities. 
B) the duration of the underlying security named in the futures contract. 
C) the price of the futures contract. 
D) All of the options are correct 
E) None of the options are correct 
A) the relative duration of bank assets and liabilities. 
B) the duration of the underlying security named in the futures contract. 
C) the price of the futures contract. 
D) All of the options are correct 
E) None of the options are correct

Question 18

A(n)_________________________ protects the lender from falling interest rates.It is the minimum rate that the borrower must pay on a floating-rate loan.

Accepted Answer

The answer of A(n)_________________________ protects the lender from falling interest...

Question 19

The buyer of a call option has the right to buy from the writer of the option contract,securities at the ________.

Accepted Answer

exercise (

Question 20

A(n)_________________________ protects the holder from rising market interest rates.It sets the maximum interest rate that a lender can charge on a floating-rate loan.

Accepted Answer

The answer of A(n)_________________________ protects the holder from rising market...

A(n)_________________________ is a new swap agreement which offsets the original interest rate swap contract.

Basis risk is the difference in the interest rates (or prices)of the same security between the cash market and the futures market.

A call option on Eurodollar deposit futures is most likely to be used by a bank to:

A financial institution with a positive interest-sensitive gap and anticipating falling interest rates could protect against loss by covering the gap with a long hedge.

In an interest rate swap agreement,__________________ reduces the default risk.This is where the swap parties exchange only the net difference between the interest payments owed.

A(n)_________________________ allows the holder the right to either sell securities to another investor (put)or buy securities from another investor (call)at a set price before the expiration date.

The gain or loss to a bank from the use of a financial futures contract depends upon:

Eurodollar contracts are quoted using:

In an interest-rate swap,the principal amount of the loan,usually called the ________________________,is not exchanged.

A futures contract on a 30-day Eurodollar time deposit is currently selling at an IMM index of 95.75 percent.The IMM index on a 30-day Eurodollar time deposit for immediate delivery is 95.10 percent.What is the basis?

Assume that two firms,one considered a high credit risk (HCR)and the other a low credit risk (LCR),are considering an interest rate swap.Each can borrow at the following rates: Fixed Rate Variable Rate LCR 8\% 5\% HCR 12\% 7\% An interest rate swap would be beneficial to both parties if:

A bank that uses a short hedge is most likely:

_______ is the spread between the cash price and futures price of an underlying asset.

A buyer of a call option on fixed-income securities is most likely to:

The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors):

A(n)_________________________ protects the lender from falling interest rates.It is the minimum rate that the borrower must pay on a floating-rate loan.

The buyer of a call option has the right to buy from the writer of the option contract,securities at the ________.

A(n)_________________________ protects the holder from rising market interest rates.It sets the maximum interest rate that a lender can charge on a floating-rate loan.

An Overview of the Changing Financial-Services Sector

The Impact of Government Policy and Regulation on the Financial-Services Industry

The Organization and Structure of Banking and the Financial-Services Industry

Establishing New Banks, Branches, ATMs, Telephone Services, and Websites

The Financial Statements of Banks and Their Principal Competitors

Measuring and Evaluating the Performance of Banks and Their Principal Competitors

Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

Risk Management: Asset-Backed Securities, Loan Sales, Credit Standbys, and Credit Derivatives

The Investment Function in Financial-Services Management

Liquidity and Reserves Management: Strategies and Policies

Managing and Pricing Deposit Services

Managing Nondeposit Liabilities

Investment Banking, insurance, and Other Sources of Fee Income

The Management of Capital

Lending Policies and Procedures: Managing Credit Risk

Lending to Business Firms and Pricing Business Loans

Consumer Loans, Credit Cards, and Real Estate Lending

Acquisitions and Mergers in Financial-Services Management

International Banking and the Future of Banking and Financial Services

Filters

Exam 14: Investment Banking,Insurance,and Other Sources of Fee Income

A(n)_________________________ is a new swap agreement which offsets the original interest rate swap contract.

Basis risk is the difference in the interest rates (or prices)of the same security between the cash market and the futures market.

A call option on Eurodollar deposit futures is most likely to be used by a bank to:

A financial institution with a positive interest-sensitive gap and anticipating falling interest rates could protect against loss by covering the gap with a long hedge.

In an interest rate swap agreement,__________________ reduces the default risk.This is where the swap parties exchange only the net difference between the interest payments owed.

A(n)_________________________ allows the holder the right to either sell securities to another investor (put)or buy securities from another investor (call)at a set price before the expiration date.

The gain or loss to a bank from the use of a financial futures contract depends upon:

Eurodollar contracts are quoted using:

In an interest-rate swap,the principal amount of the loan,usually called the ________________________,is not exchanged.

A futures contract on a 30-day Eurodollar time deposit is currently selling at an IMM index of 95.75 percent.The IMM index on a 30-day Eurodollar time deposit for immediate delivery is 95.10 percent.What is the basis?

Assume that two firms,one considered a high credit risk (HCR)and the other a low credit risk (LCR),are considering an interest rate swap.Each can borrow at the following rates: Fixed Rate Variable Rate LCR 8\% 5\% HCR 12\% 7\% An interest rate swap would be beneficial to both parties if:

A bank that uses a short hedge is most likely:

_______ is the spread between the cash price and futures price of an underlying asset.

A buyer of a call option on fixed-income securities is most likely to:

The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors):

A(n)_________________________ protects the lender from falling interest rates.It is the minimum rate that the borrower must pay on a floating-rate loan.

The buyer of a call option has the right to buy from the writer of the option contract,securities at the ________.

A(n)_________________________ protects the holder from rising market interest rates.It sets the maximum interest rate that a lender can charge on a floating-rate loan.

An Overview of the Changing Financial-Services Sector

The Impact of Government Policy and Regulation on the Financial-Services Industry

The Organization and Structure of Banking and the Financial-Services Industry

Establishing New Banks, Branches, ATMs, Telephone Services, and Websites

The Financial Statements of Banks and Their Principal Competitors

Measuring and Evaluating the Performance of Banks and Their Principal Competitors

Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

Risk Management: Asset-Backed Securities, Loan Sales, Credit Standbys, and Credit Derivatives

The Investment Function in Financial-Services Management

Liquidity and Reserves Management: Strategies and Policies

Managing and Pricing Deposit Services

Managing Nondeposit Liabilities

Investment Banking, insurance, and Other Sources of Fee Income

The Management of Capital

Lending Policies and Procedures: Managing Credit Risk

Lending to Business Firms and Pricing Business Loans

Consumer Loans, Credit Cards, and Real Estate Lending

Acquisitions and Mergers in Financial-Services Management

International Banking and the Future of Banking and Financial Services

Filters