Question 1

In terms of valuation,a 12-year interest rate swap can be can be considered in terms of

Accepted Answer

A) a series of option contracts. 
B) a zero-coupon bond. 
C) a U.S.Treasury STRIP. 
D) bond-equivalent valuation. 
A) a series of option contracts. 
B) a zero-coupon bond. 
C) a U.S.Treasury STRIP. 
D) bond-equivalent valuation.

Question 2

The underlying principle of a swap agreement is to restructure asset or liability cash flows in a preferred direction by the transacting parties.

Accepted Answer

A) True 
 B)False

Question 3

In some cases,the swap dealer will enter into a swap agreement and take one side themselves.

Accepted Answer

A) True 
 B)False

Question 4

In recent years,the fastest growing type of swap agreement has been a fixed-fixed currency swap.

Accepted Answer

A) True 
 B)False

Question 5

Currency swaps can be designed to reduce foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 6

Swaps generally have a shorter maturity or contract life than other derivative instruments.

Accepted Answer

A) True 
 B)False

Question 7

Swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a loan or a bond of a specified amount is an example of

Accepted Answer

A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap.

Question 8

An existing swap can be effectively hedged against interest rate risk by

Accepted Answer

A) selling out to another party. 
B) entering into another swap agreement that is the mirror image of the original swap. 
C) setting interest sensitive assets equal to interest sensitive liabilities. 
D) setting asset duration equal to liability duration. 
A) selling out to another party. 
B) entering into another swap agreement that is the mirror image of the original swap. 
C) setting interest sensitive assets equal to interest sensitive liabilities. 
D) setting asset duration equal to liability duration.

Question 9

The credit risk on an interest rate swap is generally much less than on an individual loan.

Accepted Answer

A) True 
 B)False

Question 10

Although AIG suffered significant losses on credit default swaps (CDS)that it sold,it was not a dominant player in the CDS market.

Accepted Answer

A) True 
 B)False

Question 11

A contract that is a fixed-floating interest rate swap with a third party acting as an intermediary is known as

Accepted Answer

A) a pure credit swap. 
B) a total return swap. 
C) an off-market swap. 
D) a plain vanilla swap. 
A) a pure credit swap. 
B) a total return swap. 
C) an off-market swap. 
D) a plain vanilla swap.

Question 12

Which of the following is the primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated?

Accepted Answer

A) Actual market rates that materialized over the life of the swap contract. 
B) London interbank offer rate (LIBOR). 
C) Upfront fee payments. 
D) Market's expectations of future short-term rates. 
A) Actual market rates that materialized over the life of the swap contract. 
B) London interbank offer rate (LIBOR). 
C) Upfront fee payments. 
D) Market's expectations of future short-term rates.

Question 13

In the derivatives markets,transactions costs are highest for

Accepted Answer

A) options. 
B) futures. 
C) forwards. 
D) swaps. 
A) options. 
B) futures. 
C) forwards. 
D) swaps.

Question 14

What is replacement risk in the swap market?

Accepted Answer

A) The risk of substituting a defaulted swap with a new swap at less favorable terms. 
B) The cost incurred by the swap dealer in replacing the defaulting party on the same terms as the original swap. 
C) The risk involved in exchanging fixed interest payments for floating interest payments by two counterparties. 
D) The risk associated with long-term hedge sometimes for as long as 15 years. 
A) The risk of substituting a defaulted swap with a new swap at less favorable terms. 
B) The cost incurred by the swap dealer in replacing the defaulting party on the same terms as the original swap. 
C) The risk involved in exchanging fixed interest payments for floating interest payments by two counterparties. 
D) The risk associated with long-term hedge sometimes for as long as 15 years.

Question 15

When a bank enters into a fixed-floating currency swap,it is exposed to

Accepted Answer

A) both interest rate and currency exposures. 
B) only interest rate exposures. 
C) only exchange rate exposure. 
D) zero interest rate exposure over the life of the swap. 
A) both interest rate and currency exposures. 
B) only interest rate exposures. 
C) only exchange rate exposure. 
D) zero interest rate exposure over the life of the swap.

Question 16

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2)percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1)percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

What will be the net after-swap yield on assets for the bank?

Accepted Answer

A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent.

Question 17

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2)percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1)percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

What will be the net after-swap yield on assets for the thrift?

Accepted Answer

A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent.

Question 18

A plain vanilla fixed-floating interest rate swap may involve a third party that acts as a broker,but is not likely to have any sophisticated special features.

Accepted Answer

A) True 
 B)False

Question 19

Consider a situation where the duration of the fixed portion of a swap is greater than the floating portion of a swap.Which of the following statements is most correct?

Accepted Answer

A) The fixed-rate payers gain when rates fall. 
B) The market value of fixed-rate payments will decrease by more than the market value of floating-rate payments when interest rates fall. 
C) The market value of fixed-rate payments will decrease by more than the market value of floating-rate payments when interest rates rise. 
D) The floating-rate payers gain when rates rise. 
A) The fixed-rate payers gain when rates fall. 
B) The market value of fixed-rate payments will decrease by more than the market value of floating-rate payments when interest rates fall. 
C) The market value of fixed-rate payments will decrease by more than the market value of floating-rate payments when interest rates rise. 
D) The floating-rate payers gain when rates rise.

Question 20

By March 2008,the notational value of credit derivative products in the commercial banking industry hit its peak at approximately $16.44 trillion.By September 2011,the notational value of these products was approximately

Accepted Answer

A) $8.9 trillion. 
B) $10.6 trillion. 
C) $13.6 trillion. 
D) $15.7 trillion. 
A) $8.9 trillion. 
B) $10.6 trillion. 
C) $13.6 trillion. 
D) $15.7 trillion.

Exam 24: Swaps

In terms of valuation,a 12-year interest rate swap can be can be considered in terms of

The underlying principle of a swap agreement is to restructure asset or liability cash flows in a preferred direction by the transacting parties.

In some cases,the swap dealer will enter into a swap agreement and take one side themselves.

In recent years,the fastest growing type of swap agreement has been a fixed-fixed currency swap.

Currency swaps can be designed to reduce foreign exchange risk.

Swaps generally have a shorter maturity or contract life than other derivative instruments.

Swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a loan or a bond of a specified amount is an example of

An existing swap can be effectively hedged against interest rate risk by

The credit risk on an interest rate swap is generally much less than on an individual loan.

Although AIG suffered significant losses on credit default swaps (CDS)that it sold,it was not a dominant player in the CDS market.

A contract that is a fixed-floating interest rate swap with a third party acting as an intermediary is known as

Which of the following is the primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated?

In the derivatives markets,transactions costs are highest for

What is replacement risk in the swap market?

When a bank enters into a fixed-floating currency swap,it is exposed to

A plain vanilla fixed-floating interest rate swap may involve a third party that acts as a broker,but is not likely to have any sophisticated special features.

Consider a situation where the duration of the fixed portion of a swap is greater than the floating portion of a swap.Which of the following statements is most correct?

By March 2008,the notational value of credit derivative products in the commercial banking industry hit its peak at approximately $16.44 trillion.By September 2011,the notational value of these products was approximately

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Loan Sales

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