Exam 8: Interest Risk and Swaps

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.

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

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

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.Choosing strategy #3 will:

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

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

A/an ________ is a contract to lock in today interest rates over a given period of time.

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

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. )

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

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

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 #3? (Assume your firm is borrowing money. )

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

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

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

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:

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?

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

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.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. )