Question 1

Why were inverse floaters developed?

Accepted Answer

A) To exchange specified periodic cash flows in the future based on some underlying instrument. 
B) To better manage their interest rate, foreign exchange, and credit risks of corporate enterprises. 
C) To lower the cost of financing for government agencies. 
D) To determine payments and timing of payments when there is no standardized contract. 
E) To keep the swap market liquid by locating or matching counterparties. 
A) To exchange specified periodic cash flows in the future based on some underlying instrument. 
B) To better manage their interest rate, foreign exchange, and credit risks of corporate enterprises. 
C) To lower the cost of financing for government agencies. 
D) To determine payments and timing of payments when there is no standardized contract. 
E) To keep the swap market liquid by locating or matching counterparties.

Question 2

A pure credit swap

Accepted Answer

A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in a total return swap. 
D) All of the options. 
E) None of the options. 
A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in a total return swap. 
D) All of the options. 
E) None of the options.

Question 3

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. What will be the net after-swap cost of funds for the thrift if the cash market liabilities are included in the analysis?

Accepted Answer

A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
E) None of the options. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
E) None of the options.

Question 4

When compared to swap and option contracts, credit risk exposure is greatest with a futures contract.

Accepted Answer

A) True 
 B)False

Question 5

A total return credit swap is eliminates interest rate risk as well as credit risk.

Accepted Answer

A) True 
 B)False

Question 6

The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.

Accepted Answer

A) True 
 B)False

Question 7

The cash flows that actually are paid on an interest rate swap depend on

Accepted Answer

A) the market's expectations of future short-term interest rates. 
B) upfront fee payments. 
C) varying notional values underlying the swap. 
D) special interest rate terms and indexes. 
E) actual market rates that materialize over the life of the swap contract. 
A) the market's expectations of future short-term interest rates. 
B) upfront fee payments. 
C) varying notional values underlying the swap. 
D) special interest rate terms and indexes. 
E) actual market rates that materialize over the life of the swap contract.

Question 8

SOFR is an overnight, secured reference rate administered by the New York Fed that broadly measures the cost of borrowing cash overnight collateralized by Treasury securities.

Accepted Answer

A) True 
 B)False

Question 9

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. Assume that the thrift variable-rate liabilities are CDs indexed to some domestic rate.Which of the following statements describes the hedge characteristics of the above example?

Accepted Answer

A) The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates. 
B) Only the bank is fully hedged. 
C) The thrift is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time. 
D) All of the options. 
E) The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates, and only the bank is fully hedged. 
A) The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates. 
B) Only the bank is fully hedged. 
C) The thrift is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time. 
D) All of the options. 
E) The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates, and only the bank is fully hedged.

Question 10

A contract that is a fixed-floating interest rate swap with a third party acting as an intermediary is known as

Accepted Answer

A) a pure credit swap. 
B) a total return swap. 
C) an off-market swap. 
D) a plain vanilla swap. 
E) an currency rate swap. 
A) a pure credit swap. 
B) a total return swap. 
C) an off-market swap. 
D) a plain vanilla swap. 
E) an currency rate swap.

Question 11

A total return swap involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan or a bond of a specified amount.

Accepted Answer

A) True 
 B)False

Question 12

Swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a loan or a bond of a specified amount is an example of

Accepted Answer

A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap. 
A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap.

Question 13

The on-the-run yield curve of U.S.Treasury securities is the yield curve for outstanding, previously issued securities.

Accepted Answer

A) True 
 B)False

Question 14

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. What will be the net after-swap cost of funds for the bank if the cash market liabilities are included in the analysis?

Accepted Answer

A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
E) None of the options. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
E) None of the options.

Question 15

A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities is

Accepted Answer

A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap. 
A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap.

Question 16

The largest segment of the global swap market is the currency swap market.

Accepted Answer

A) True 
 B)False

Question 17

A total return credit swap

Accepted Answer

A) can allow an FI to maintain long-term customer lending relationships without bearing the full credit risk exposure from these relationships. 
B) involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan of a specified amount. 
C) can be important because credit risk is more likely to cause an FI to fail than either interest rate risk or FX risk. 
D) All of the options. 
E) can allow an FI to maintain long-term customer lending relationships without bearing the full credit risk exposure from these relationships and can be important because credit risk is more likely to cause an FI to fail than either interest rate risk or FX risk. 
A) can allow an FI to maintain long-term customer lending relationships without bearing the full credit risk exposure from these relationships. 
B) involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan of a specified amount. 
C) can be important because credit risk is more likely to cause an FI to fail than either interest rate risk or FX risk. 
D) All of the options. 
E) can allow an FI to maintain long-term customer lending relationships without bearing the full credit risk exposure from these relationships and can be important because credit risk is more likely to cause an FI to fail than either interest rate risk or FX risk.

Question 18

An existing swap can be effectively hedged against interest rate risk by

Accepted Answer

A) selling out to another party. 
B) entering into another swap agreement that is the mirror image of the original swap. 
C) setting interest sensitive assets equal to interest sensitive liabilities. 
D) setting asset duration equal to liability duration. 
E) defaulting to the swap intermediary. 
A) selling out to another party. 
B) entering into another swap agreement that is the mirror image of the original swap. 
C) setting interest sensitive assets equal to interest sensitive liabilities. 
D) setting asset duration equal to liability duration. 
E) defaulting to the swap intermediary.

Question 19

The underlying principle of a swap agreement is to restructure asset or liability cash flows in a preferred direction by the transacting parties.

Accepted Answer

A) True 
 B)False

Question 20

During the most recent financial crisis, the FI segment that was most negatively affected by credit default swaps was

Accepted Answer

A) commercial banks. 
B) insurance companies. 
C) pension funds. 
D) finance companies. 
E) mutual funds. 
A) commercial banks. 
B) insurance companies. 
C) pension funds. 
D) finance companies. 
E) mutual funds.

Exam 25: Swaps

Why were inverse floaters developed?

A pure credit swap

When compared to swap and option contracts, credit risk exposure is greatest with a futures contract.

A total return credit swap is eliminates interest rate risk as well as credit risk.

The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.

The cash flows that actually are paid on an interest rate swap depend on

SOFR is an overnight, secured reference rate administered by the New York Fed that broadly measures the cost of borrowing cash overnight collateralized by Treasury securities.

A contract that is a fixed-floating interest rate swap with a third party acting as an intermediary is known as

A total return swap involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan or a bond of a specified amount.

Swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a loan or a bond of a specified amount is an example of

The on-the-run yield curve of U.S.Treasury securities is the yield curve for outstanding, previously issued securities.

A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities is

The largest segment of the global swap market is the currency swap market.

A total return credit swap

An existing swap can be effectively hedged against interest rate risk by

The underlying principle of a swap agreement is to restructure asset or liability cash flows in a preferred direction by the transacting parties.

During the most recent financial crisis, the FI segment that was most negatively affected by credit default swaps was

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Loan Sales

Securitization

Filters