Question 1

A company can invest funds for five years at LIBOR minus 30 basis points.The five-year swap rate is 3%.What fixed rate of interest can the company earn by using the swap?

Accepted Answer

A)   2.4%
B)   2.7%
C)   3.0%
D)   3.3%E) C) and D)
F) None of the above

Question 2

Which of the following is true for an interest rate swap?

Accepted Answer

A)   A swap is usually worth close to zero when it is first negotiated
B)   Each forward rate agreement underlying a swap is worth close to zero when the swap is first entered into
C)   Comparative advantage is a valid reason for entering into the swap
D)   None of the aboveE) A) and D)
F) B) and C)

Question 3

Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla interest rate swap?

Accepted Answer

A)   Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
B)   Interest is paid at the end of the accrual period in a LIBOR-in-arrears swap
C)   No floating interest is paid until the end of the life of the swap in a LIBOR-in-arrears swap, but fixed payments are made throughout the life of the swap
D)   Neither floating nor fixed payments are made until the end of the life of the swapE) B) and C)
F) C) and D)

Question 4

Which of the following is true?

Accepted Answer

A)   Principals are not usually exchanged in a currency swap
B)   The principal amounts usually flow in the opposite direction to interest payments at the beginning of a currency swap and in the same direction as interest payments at the end of the swap.
C)   The principal amounts usually flow in the same direction as interest payments at the beginning of a currency swap and in the opposite direction to interest payments at the end of the swap.
D)   Principals are not usually specified in a currency swapE) None of the above
F) C) and D)

Question 5

A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual compounding) has a remaining life of nine months.The six-month LIBOR rate observed three months ago was 4.85% with semi-annual compounding.Today's three and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded) respectively.From this it can be calculated that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-annual compounding.If the swap has a principal value of $15,000,000,what is the value of the swap to the party receiving a fixed rate of interest? Assume OIS rates are the same as LIBOR rates.

Accepted Answer

A)   $74,250
B)   −$70,933
C)   −$11,250
D)   $103,790E) A) and C)
F) B) and C)

Question 6

Which of the following is true for the party paying fixed in an interest rate swap? Assume no other transactions with the counterparty.

Accepted Answer

A)   There is more credit risk when the yield curve is upward sloping than when it is downward sloping
B)   There is more credit risk when the yield curve is downward sloping than when it is upward sloping
C)   The credit exposure increases when interest rates decline
D)   There is no credit exposure providing a financial institution is used as the intermediaryE) All of the above
F) C) and D)

Question 7

A floating-for-fixed currency swap is equivalent to

Accepted Answer

A)   Two interest rate swaps, one in each currency
B)   A fixed-for-fixed currency swap and one interest rate swap
C)   A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
D)   None of the aboveE) C) and D)
F) B) and C)

Question 8

A floating for floating currency swap is equivalent to

Accepted Answer

A)   Two interest rate swaps, one in each currency
B)   A fixed-for-fixed currency swap and one interest rate swap
C)   A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
D)   None of the aboveE) A) and B)
F) A) and C)

Question 9

An interest rate swap has three years of remaining life.Payments are exchanged annually.Interest at 3% is paid and 12-month LIBOR is received.A exchange of payments has just taken place.The one-year,two-year and three-year LIBOR/swap zero rates are 2%,3% and 4%.All rates an annually compounded.What is the value of the swap as a percentage of the principal when OIS and LIBOR rates are the same

Accepted Answer

A)   0.00
B)   2.66
C)   2.06
D)   1.06E) A) and D)
F) All of the above

Question 10

A fixed-for-fixed currency swap

Accepted Answer

A)   Is equivalent to a portfolio of FRAs
B)   Is equivalent to a long position in one bond and a short position in another bond
C)   Is worth the same whether or not principals are exchanged
D)   Involves no exchange of principals at the beginning of its lifeE) A) and B)
F) B) and C)

Question 11

Which of the following is closest to the bid-offer spread on the swap rate for a plain vanilla interest rate swap?

Accepted Answer

A)   3 basis points
B)   8 basis points
C)   13 basis points
D)   18 basis pointsE) A) and B)
F) A) and C)

Question 12

Which of the following is a way of valuing interest rate swaps where LIBOR is exchanged for a fixed rate of interest?

Accepted Answer

A)   Assume that floating payments will equal forward LIBOR rates and discount net cash flows at the risk-free rate
B)   Assume that floating payments will equal forward OIS rates and discount net cash flows at the risk-free rate
C)   Assume that floating payments will equal forward LIBOR rates and discount net cash flows at the swap rate
D)   Assume that floating payments will equal forward OIS rates and discount net cash flows at the swap rateE) A) and D)
F) None of the above

Question 13

A company enters into an interest rate swap where it is paying fixed and receiving LIBOR.When interest rates increase,which of the following is true?

Accepted Answer

A)   The value of the swap to the company increases
B)   The value of the swap to the company decreases
C)   The value of the swap can either increase or decrease
D)   The value of the swap does not change providing the swap rate remains the sameE) C) and D)
F) A) and D) A

Question 14

Which of the following describes a 3-month overnight indexed swap (OIS) ?

Accepted Answer

A)   A fixed rate is exchanged for the overnight rate every day for three months
B)   LIBOR is exchanged for the overnight rate every day for three months
C)   The arithmetic average of overnight rates is exchanged for a fixed rate at the end of three months
D)   The geometric average of overnight rates is exchanged for a fixed rate at the end of three monthsE) A) and B)
F) B) and D)

Question 15

Which of the following describes an interest rate swap?

Accepted Answer

A)   A way of converting a liability from fixed to floating
B)   A portfolio of forward rate agreements
C)   An agreement to exchange interest at a fixed rate for interest at a floating rate
D)   All of the aboveE) B) and C)
F) A) and B)

Question 16

Which of the following is usually true

Accepted Answer

A)   OIS rates are less than the corresponding LIBOR rates
B)   OIS rates are greater than corresponding LIBOR rates
C)   OIS rates are sometimes greater and sometimes less than LIBOR rates
D)   OIS rates are equivalent to one-day LIBOR ratesE) None of the above
F) C) and D)

Question 17

Which of the following is a use of a currency swap?

Accepted Answer

A)   To exchange an investment in one currency for an investment in another currency
B)   To exchange borrowing in one currency for borrowings in another currency
C)   To take advantage situations where the tax rates in two countries are different
D)   All of the aboveE) A) and C)
F) None of the above

Question 18

Since the 2008 credit crisis

Accepted Answer

A)   LIBOR has replaced OIS as the discount rate for non-collateralized swaps
B)   OIS has replaced LIBOR as the discount rate, but only for non-collateralized swaps
C)   LIBOR has replaced OIS as the discount rate for collateralized swaps
D)   OIS has replaced LIBOR as the discount rate for swapsE) A) and B)
F) A) and C)

Question 19

Which of the following describes the five-year swap rate?

Accepted Answer

A)   The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR on a 5-year swap
B)   The fixed rate of interest which a swap market maker is prepared to receive in exchange for LIBOR on a 5-year swap
C)   The average of A and B
D)   The higher of A and BE) All of the above
F) C) and D) C

Question 20

Which of the following describes the five-year swap rate?

Accepted Answer

A)   The rate on a five-year loan to a AA-rated company
B)   The rate on a five-year loan to an A-rated company
C)   The rate that can be earned over five years from a series of short-term loans to AA-rated companies
D)   The rate that can be earned over five years from a series of short-term loans to A-rated companiesE) A) and B)
F) All of the above C

Exam 7: Swaps

A company can invest funds for five years at LIBOR minus 30 basis points.The five-year swap rate is 3%.What fixed rate of interest can the company earn by using the swap?

Correct Answer
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Which of the following is true for an interest rate swap?

Correct Answer
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Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla interest rate swap?

Correct Answer
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Which of the following is true?

Correct Answer
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Correct Answer
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Which of the following is true for the party paying fixed in an interest rate swap? Assume no other transactions with the counterparty.

Correct Answer
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A floating-for-fixed currency swap is equivalent to

Correct Answer
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A floating for floating currency swap is equivalent to

Correct Answer
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Correct Answer
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A fixed-for-fixed currency swap

Correct Answer
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Which of the following is closest to the bid-offer spread on the swap rate for a plain vanilla interest rate swap?

Correct Answer
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Which of the following is a way of valuing interest rate swaps where LIBOR is exchanged for a fixed rate of interest?

Correct Answer
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A company enters into an interest rate swap where it is paying fixed and receiving LIBOR.When interest rates increase,which of the following is true?

Correct Answer
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A

Which of the following describes a 3-month overnight indexed swap (OIS) ?

Correct Answer
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Which of the following describes an interest rate swap?

Correct Answer
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Which of the following is usually true

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Which of the following is a use of a currency swap?

Correct Answer
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Since the 2008 credit crisis

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Which of the following describes the five-year swap rate?

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C

Which of the following describes the five-year swap rate?

Correct Answer
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C

Exam 7: Swaps

A company can invest funds for five years at LIBOR minus 30 basis points.The five-year swap rate is 3%.What fixed rate of interest can the company earn by using the swap?

Correct AnswerverifiedShow Answer

Which of the following is true for an interest rate swap?

Correct AnswerverifiedShow Answer

Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla interest rate swap?

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is true for the party paying fixed in an interest rate swap? Assume no other transactions with the counterparty.

Correct AnswerverifiedShow Answer

A floating-for-fixed currency swap is equivalent to

Correct AnswerverifiedShow Answer

A floating for floating currency swap is equivalent to

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A fixed-for-fixed currency swap

Correct AnswerverifiedShow Answer

Which of the following is closest to the bid-offer spread on the swap rate for a plain vanilla interest rate swap?

Correct AnswerverifiedShow Answer

Which of the following is a way of valuing interest rate swaps where LIBOR is exchanged for a fixed rate of interest?

Correct AnswerverifiedShow Answer

A company enters into an interest rate swap where it is paying fixed and receiving LIBOR.When interest rates increase,which of the following is true?

Correct AnswerverifiedA

Which of the following describes a 3-month overnight indexed swap (OIS) ?

Correct AnswerverifiedShow Answer

Which of the following describes an interest rate swap?

Correct AnswerverifiedShow Answer

Which of the following is usually true

Correct AnswerverifiedShow Answer

Which of the following is a use of a currency swap?

Correct AnswerverifiedShow Answer

Since the 2008 credit crisis

Correct AnswerverifiedShow Answer

Which of the following describes the five-year swap rate?

Correct AnswerverifiedC

Which of the following describes the five-year swap rate?

Correct AnswerverifiedC

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A

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C

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C