Interest Rate And Currency Swaps

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Question 1
Free
Multiple Choice

The term interest rate swap

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A

refers to a "single-currency interest rate swap" shortened to "interest rate swap".

B

involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals.

C

can be "fixed-for-floating rate" or "fixed-for-fixed rate".

D

all of the above

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Question 2
Free
Multiple Choice

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

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A

fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating- rate debt obligations for fixed-rate interest payments of the other counter party.

B

fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in another currency.

C

both a) and b)

D

none of the above

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Question 3
Free
Multiple Choice

The primary reasons for a counterparty to use a currency swap are

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A

to hedge and to speculate.

B

to play in the futures and forward markets.

C

to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure.

D

both a) and b)

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Question 4
Free
Multiple Choice

The size of the swap market is

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A

measured by notational principal.

B

over 7 trillion dollars.

C

both a) and b)

D

none of the above

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Question 5
Free
Multiple Choice

Which combination of the following statements is true about a swap bank? image

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A

(i) and (ii)

B

(i), (ii) and (iii)

C

(i), (ii), (iii) and (iv)

D

(i), (ii), (iii), (iv) and (v)

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Question 6
Multiple Choice

A swap bank

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A
can act as a broker, bringing together counterparties to a swap.
B
can act as a dealer, standing ready to buy and sell swaps.
C
both a) and b)
D
only sometimes a) but never ever b)
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Question 7
Multiple Choice

In the swap market,which position potentially carries greater risks,broker or dealer?

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A
Broker
B
Dealer
C
They are the same swaps, therefore the same risks.
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Question 8
Multiple Choice

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

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A
the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR.
B
the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR.
C
both a) and b)
D
none of the above
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Question 9
Multiple Choice

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

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A
the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR.
B
the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR.
C
if the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points.
D
none of the above
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Question 10
Multiple Choice

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms: image

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A
The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans.
B
The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans.
C
The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans.
D
None of the above
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Question 11
Multiple Choice

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent in dollars and 6.60-6.80 percent in euro against six-month dollar LIBOR.This means

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A
the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate euro payments of 6.80.
B
the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate dollar payments of 8.60.
C
both a) and b)
D
none of the above
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Question 12
Multiple Choice

An interest-only single currency interest rate swap

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A
is also known as a plain vanilla swap.
B
is also known as an interest rate swap.
C
is about as simple as swaps can get.
D
all of the above
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Question 13
Multiple Choice

Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has a AAA credit rating,but company Y's credit standing is considerably lower.

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A
Company X should demand most of the QSD in any swap with Y as compensation for default risk.
B
Since Y has a poor credit rating, it would not be a participant in the swap market.
C
Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation.
D
both a) and c)
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Question 14
Multiple Choice

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get".

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A
If the swap bank has already contracted one leg of the swap, they should be anxious to offer better terms to company Y to just get the deal done.
B
The swap bank could just sell the company X side of the swap.
C
Company X should lobby Y to "get on board".
D
Both a) and b)
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Question 15
Multiple Choice

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get".

Choose correct answer/s
A
The swap bank could just sell the company X side of the swap.
B
Company X should lobby Y to "get on board".
C
Company Y should calculate the QSD and subtract that from their best outside offer.
D
None of the above
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Question 16
Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: image A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%. What is the value of this swap to company X?

Choose correct answer/s
A
Company X will lose money on the deal.
B
Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
C
Company X will only break even on the deal.
D
Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.
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Question 17
Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: image A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of 9.90%.In exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR - 0.15%; What is the value of this swap to company Y?

Choose correct answer/s
A
Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year.
B
Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year.
C
Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year.
D
Company Y will only break even on the deal.
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Question 18
Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: image A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%. image What is the value of this swap to the swap bank?

Choose correct answer/s
A
The swap bank will lose money on the deal.
B
The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.
C
The swap bank will break even.
D
None of the above
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Question 19
Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: image A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05%.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%. image What is the value of this swap to the swap bank?

Choose correct answer/s
A
The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.
B
The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year.
C
The swap bank will LOSE money.
D
None of the above
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Question 20
Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: image A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume both X and Y agree to the swap bank's terms.
Fill in the values for A,B,C,D,E,& F on the diagram. image

Choose correct answer/s
A
A = LIBOR; B = 10.45%; C =10.05%; D = LIBOR; E = LIBOR; F = 12%
B
A = 10%; B = 10.45%; C =10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1½%
C
A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; E = 10.05%; F = LIBOR + 1½%
D
A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½% image
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