Question 1

The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

Accepted Answer

A) True 
 B)False

Question 2

A U.S. bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million. The current exchange rate is $1.50/£. The interest payments will be exchanged at the end of the year at the prevailing rates.
-At the end of the year, LIBOR is 4 percent and the exchange rate is $1.50/£. What is the net payment paid or received in dollars by the U.S. bank?

Accepted Answer

A) The U.S.bank paid $12 million and received $8 million for a net payment of $4 million. 
B) The U.S.bank paid $12 million and received $10 million for a net payment of $2 million. 
C) The U.S.bank paid $12 million and received $12 million for a net receipt of $0 million. 
D) The U.S.bank paid $12 million and received $14 million for a net receipt of $2 million. 
E) The U.S.bank paid $12 million and received $16 million for a net receipt of $4 million. 
A) The U.S.bank paid $12 million and received $8 million for a net payment of $4 million. 
B) The U.S.bank paid $12 million and received $10 million for a net payment of $2 million. 
C) The U.S.bank paid $12 million and received $12 million for a net receipt of $0 million. 
D) The U.S.bank paid $12 million and received $14 million for a net receipt of $2 million. 
E) The U.S.bank paid $12 million and received $16 million for a net receipt of $4 million.

Question 3

In the derivatives markets, the instrument with the longest potential maturity is

Accepted Answer

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

Question 4

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. 
E) zero interest rate and currency 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. 
E) zero interest rate and currency exposure over the life of the swap.

Question 5

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. 
E) The comparative disadvantage faced by swap seller in making variable or floating rate payments. 
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. 
E) The comparative disadvantage faced by swap seller in making variable or floating rate payments.

Question 6

The vast majority of credit derivative contracts held by commercial banks consist of credit

Accepted Answer

A) forward contracts. 
B) futures contracts. 
C) options. 
D) swaps. 
E) currency contracts. 
A) forward contracts. 
B) futures contracts. 
C) options. 
D) swaps. 
E) currency contracts.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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. 
E) The market value of the swap will increase with an increase in interest rates. 
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. 
E) The market value of the swap will increase with an increase in interest rates.

Question 9

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

Accepted Answer

A) a currency swap agreement to receive the fixed rate payment. 
B) an interest rate swap agreement to make the fixed-rate payment side of the swap. 
C) a credit swap agreement to receive the floating rate payment. 
D) a commodity swap agreement to make the fixed-rate payment side of the swap. 
E) an equity swap agreement to make the floating-rate payment side of the swap. 
A) a currency swap agreement to receive the fixed rate payment. 
B) an interest rate swap agreement to make the fixed-rate payment side of the swap. 
C) a credit swap agreement to receive the floating rate payment. 
D) a commodity swap agreement to make the fixed-rate payment side of the swap. 
E) an equity swap agreement to make the floating-rate payment side of the swap.

Question 10

Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

Accepted Answer

A) Netting of payments. 
B) Payment flows are interest and not principal. 
C) Standby letters of credit are available. 
D) Swaps can be cancelled, individual loans cannot. 
E) None of the above. 
A) Netting of payments. 
B) Payment flows are interest and not principal. 
C) Standby letters of credit are available. 
D) Swaps can be cancelled, individual loans cannot. 
E) None of the above.

Question 11

Swaps create value if

Accepted Answer

A) relative prices differ across markets. 
B) there are barriers to entry in some markets. 
C) information is costly. 
D) All of the above. 
E) None of the above. 
A) relative prices differ across markets. 
B) there are barriers to entry in some markets. 
C) information is costly. 
D) All of the above. 
E) None of the above.

Question 12

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 cost of funds for the bank if the cash market liabilities are included in the analysis?

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. 
E) None of the abovE. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
E) None of the abovE.

Question 13

A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years. One-year maturity notes are currently priced at par and are paying 4.5 percent annually. Two-year maturity notes are currently priced at par and are paying 5 percent annually. The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield.
-What is the forward one-year discount yield expected next year?

Accepted Answer

A) 5.013 percent. 
B) 5.530 percent. 
C) 4.500 percent. 
D) 5.000 percent. 
E) 4.950 percent. 
A) 5.013 percent. 
B) 5.530 percent. 
C) 4.500 percent. 
D) 5.000 percent. 
E) 4.950 percent.

Question 14

A U.S. bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million. The current exchange rate is $1.50/£. The interest payments will be exchanged at the end of the year at the prevailing rates.
-What is the nominal payment paid or received by the U.S. bank over the three year period?

Accepted Answer

A) The U.S.bank received $2 million over the three year period. 
B) The U.S.bank received $1 million over the three year period. 
C) The U.S.bank paid $0 over the 3 year period. 
D) The U.S.bank paid $1 million over the three period. 
E) The U.S.bank paid $2 million over the three period. 
A) The U.S.bank received $2 million over the three year period. 
B) The U.S.bank received $1 million over the three year period. 
C) The U.S.bank paid $0 over the 3 year period. 
D) The U.S.bank paid $1 million over the three period. 
E) The U.S.bank paid $2 million over the three period.

Question 15

During the most recent financial crisis, the FI segment that was most negatively affected by credit default swaps was

Accepted Answer

A) commercial banks. 
B) insurance companies. 
C) pension funds. 
D) finance companies. 
E) mutual funds. 
A) commercial banks. 
B) insurance companies. 
C) pension funds. 
D) finance companies. 
E) mutual funds.

Question 16

In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

Accepted Answer

A) True 
 B)False

Question 17

At the end of 2012, the world-wide notational value of swap agreements was less than $400 trillion.

Accepted Answer

A) True 
 B)False

The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

In the derivatives markets, the instrument with the longest potential maturity is

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

What is replacement risk in the swap market?

The vast majority of credit derivative contracts held by commercial banks consist of credit

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

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?

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

Swaps create value if

During the most recent financial crisis, the FI segment that was most negatively affected by credit default swaps was

In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

At the end of 2012, the world-wide notational value of swap agreements was less than $400 trillion.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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

Securitization

Filters

Exam 24: Swaps

The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

In the derivatives markets, the instrument with the longest potential maturity is

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

What is replacement risk in the swap market?

The vast majority of credit derivative contracts held by commercial banks consist of credit

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

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?

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

Swaps create value if

During the most recent financial crisis, the FI segment that was most negatively affected by credit default swaps was

In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

At the end of 2012, the world-wide notational value of swap agreements was less than $400 trillion.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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

Securitization

Filters