Question 1

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  False

Question 2

Instruction 8.1:
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 B

Question 3

Instruction 8.1:
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 
A)  Strategy #1 
B)  Strategy #2 
C)  Strategy #3 
D)  Strategies #1 and #2 D

Question 4

Unlike the situation with exchange rate risk, there is no uncertainty on the part of management for shareholder preferences regarding interest rate risk. Shareholders prefer that managers hedge interest rate risk rather than having shareholders diversify away such risk through portfolio diversification.

Accepted Answer

A) True 
 B)False

Question 5

An agreement to swap the currencies of a debt service obligation would be termed a/an:

Accepted Answer

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

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

A swap agreement may involve currencies or interest rates, but never both.

Accepted Answer

A) True 
 B)False

Question 8

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

Accepted Answer

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

Question 11

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going up, 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. 
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 12

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

Question 13

Which of the following would be considered an example of a currency swap?

Accepted Answer

A)  exchanging a dollar interest obligation for a British pound obligation 
B)  exchanging a eurodollar interest obligation for a dollar obligation 
C)  exchanging a eurodollar interest obligation for a British pound obligation 
D)  All of the above are examples of a currency swap. 
A)  exchanging a dollar interest obligation for a British pound obligation 
B)  exchanging a eurodollar interest obligation for a dollar obligation 
C)  exchanging a eurodollar interest obligation for a British pound obligation 
D)  All of the above are examples of a currency swap.

Question 14

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 15

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. 
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 16

Instruction 8.1:
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 #2? (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. 
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 17

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 18

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 19

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 20

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 
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

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

An agreement to swap the currencies of a debt service obligation would be termed a/an:

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

A swap agreement may involve currencies or interest rates, but never both.

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

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

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

Which of the following would be considered an example of a currency swap?

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

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:

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.

The single largest interest rate risk of a firm is:

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

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:

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 and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

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

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

An agreement to swap the currencies of a debt service obligation would be termed a/an:

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

A swap agreement may involve currencies or interest rates, but never both.

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

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

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

Which of the following would be considered an example of a currency swap?

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

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:

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.

The single largest interest rate risk of a firm is:

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

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:

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 and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters