Question 1

The single largest interest rate risk of a firm is:

Accepted Answer

A)  interest sensitive securities. 
B)  debt service. 
C)  dividend payments. 
D)  accounts payable. 
A)  interest sensitive securities. 
B)  debt service. 
C)  dividend payments. 
D)  accounts payable.

Question 2

Swap rates are derived from the yield curves in each major currency.

Accepted Answer

A) True 
 B)False

Question 3

For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1.Choosing strategy #2 will:

Accepted Answer

A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period. 
A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period.

Question 4

For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1.The risk of strategy #1 is that interest rates might go down or that your credit rating might improve.The risk of strategy #2 is: (Assume your firm is borrowing money.)

Accepted Answer

A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above 
A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above

Question 5

The basis point spreads between credit ratings dramatically rise for borrowers of credit qualities less than BBB.

Accepted Answer

A) True 
 B)False

Question 6

A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to:

Accepted Answer

A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate. 
A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate.

Question 7

Sovereign credit risk is the global financial market's assessment of the ability of a sovereign borrower to repay USD denominated debt.

Accepted Answer

A) True 
 B)False

Question 8

Individual borrowers - whether they be governments or companies - possess their own individual credit rating,the market's assessment of their ability to repay debt in a timely manner.These credit assessments influence all the following EXCEPT:

Accepted Answer

A)  cost of capital 
B)  access to capital 
C)  credit risk premium 
D)  risk-free rate 
A)  cost of capital 
B)  access to capital 
C)  credit risk premium 
D)  risk-free rate

Question 9

The real exposure of an interest or currency swap is not the total notional principal,but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.

Accepted Answer

A) True 
 B)False

The single largest interest rate risk of a firm is:

Swap rates are derived from the yield curves in each major currency.

The basis point spreads between credit ratings dramatically rise for borrowers of credit qualities less than BBB.

A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to:

Sovereign credit risk is the global financial market's assessment of the ability of a sovereign borrower to repay USD denominated debt.

Individual borrowers - whether they be governments or companies - possess their own individual credit rating,the market's assessment of their ability to repay debt in a timely manner.These credit assessments influence all the following EXCEPT:

The real exposure of an interest or currency swap is not the total notional principal,but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

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Exam 8: Interest Risk and Swaps

The single largest interest rate risk of a firm is:

Swap rates are derived from the yield curves in each major currency.

The basis point spreads between credit ratings dramatically rise for borrowers of credit qualities less than BBB.

A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to:

Sovereign credit risk is the global financial market's assessment of the ability of a sovereign borrower to repay USD denominated debt.

Individual borrowers - whether they be governments or companies - possess their own individual credit rating,the market's assessment of their ability to repay debt in a timely manner.These credit assessments influence all the following EXCEPT:

The real exposure of an interest or currency swap is not the total notional principal,but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters