Question 1

Historically,interest rate movements have shown less variability and greater stability than exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 2

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

Accepted Answer

A)  do nothing. 
B)  pay floating and receive fixed. 
C)  receive floating and pay fixed. 
D)  none of the above

Question 3

A firm entering into a currency or interest rate swap agreement holds no responsibility for the timely servicing of its own debt obligations since that responsibility now is born by the second party to the contract.

Accepted Answer

A) True 
 B)False

Question 4

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

Accepted Answer

A)  forward rate agreement. 
B)  interest rate future. 
C)  interest rate swap. 
D)  none of the above

Question 5

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit.________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

Accepted Answer

A)  Credit risk; Interest rate risk 
B)  Repricing risk; Credit risk 
C)  Interest rate risk; Credit risk 
D)  Credit risk; Repricing risk

Question 6

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

Accepted Answer

The answer of How does counterparty risk influence a firm's...

Question 7

A firm with variable-rate debt that expects interest rates to rise 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.

Question 8

Some of the world's largest and most financially sound firms may borrow at variable rates less than LIBOR.

Accepted Answer

A) True 
 B)False

Question 9

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 #1 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.

Question 10

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up.Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

Accepted Answer

The answer of Your firm is faced with paying a...

Question 11

The financial manager of a firm has a variable rate loan outstanding.If she wishes to protect the firm against an unfavorable increase in interest rates she could:

Accepted Answer

A)  sell an interest rate futures contract of a similar maturity to the loan. 
B)  buy an interest rate futures contract of a similar maturity to the loan. 
C)  swap the adjustable rate loan for another of a different maturity. 
D)  none of the above

Question 12

Which of the following is an unlikely reason for firms to participate in the swap market?

Accepted Answer

A)  To replace cash flows scheduled in an undesired currency with cash flows in a desired currency. 
B)  Firms may raise capital in one currency but desire to repay it in another currency. 
C)  Firms desire to swap fixed and variable payment or receipt of funds. 
D)  All of the above are likely reasons for a firm to enter the swap market.

Question 13

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.If your firm felt very confident that interest rates would fall or,at worst,remain at current levels,and were very confident about the firm's credit rating for the next 10 years,which strategy would you likely choose? (Assume your firm is borrowing money.)

Accepted Answer

A)  Strategy #3 
B)  Strategy #2 
C)  Strategy #1 
D)  Strategy #1, #2, or #3; you are indifferent among the choices.

Question 14

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.After the fact,under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)

Accepted Answer

A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment.

Question 15

One of the reasons companies use interest rate swaps is because they are interested in opportunities to lower the cost of their debt.

Accepted Answer

A) True 
 B)False

Question 16

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going down,the position outcome would be:

Accepted Answer

A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit.

Question 17

Interest rate calculations differ by the number of days used in the period's calculation and in the definition of how many days there are in a year (for financial purposes).One of the practices is to use 260 business days in a year.

Accepted Answer

A) True 
 B)False

Question 18

The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:

Accepted Answer

A)  interest rate risk. 
B)  credit risk. 
C)  counterparty risk. 
D)  clearinghouse risk.

Question 19

Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.

Accepted Answer

A) True 
 B)False

Question 20

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.Which strategy (strategies)will eliminate credit risk?

Accepted Answer

A)  Strategy #1 
B)  Strategy #2 
C)  Strategy #3 
D)  Strategies #1 and #2

Exam 8: Interest Risk and Swaps

Historically,interest rate movements have shown less variability and greater stability than exchange rate movements.

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

A firm entering into a currency or interest rate swap agreement holds no responsibility for the timely servicing of its own debt obligations since that responsibility now is born by the second party to the contract.

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

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

Some of the world's largest and most financially sound firms may borrow at variable rates less than LIBOR.

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up.Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

The financial manager of a firm has a variable rate loan outstanding.If she wishes to protect the firm against an unfavorable increase in interest rates she could:

Which of the following is an unlikely reason for firms to participate in the swap market?

One of the reasons companies use interest rate swaps is because they are interested in opportunities to lower the cost of their debt.

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going down,the position outcome would be:

Interest rate calculations differ by the number of days used in the period's calculation and in the definition of how many days there are in a year (for financial purposes).One of the practices is to use 260 business days in a year.

The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:

Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.