Exam 30: OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

In comparing a swap to a futures or forward contract where the underlying is an interest rate instrument such as a Eurodollar CD, which of the below statements is FALSE?

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Question 1

Correct Answer:

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If at the settlement date the settlement rate is the contract rate, the FRA buyer because the buyer can borrow funds at a below-market rate.

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Question 2

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What is a forward rate agreement (FRA)? Describe the elements associated with an FRA.

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Question 3

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A forward rate agreement (FRA) is the over-the-counter equivalent of the exchange-traded futures contracts on short-term rates. Typically, the short-term rate is LIBOR. The elements of an FRA are the contract rate, reference rate, settlement rate, notional amount, and settlement date. The parties to an FRA agree to buy and sell funds on the settlement date. The FRA's contract rate is the rate specified in the FRA at which the buyer of the FRA agrees to pay for funds and the seller of the FRA agrees to receive for investing funds. The reference rate is the interest rate used. For example, the reference rate could be three-month LIBOR or six-month LIBOR. The benchmark from which the interest payments are to be calculated is specified in the FRA and is called the notional amount (or notional principal amount). This amount is not exchanged between the two parties. The settlement rate is the value of the reference rate at the FRA's settlement date. The source for determining the settlement rate is specified in the FRA.

There are two ways that a swap position can be interpreted. Which of the below is ONE of these?

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Question 4

Which of the below statements is FALSE?

(Multiple Choice)

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Question 5

A can be viewed as a package of FRAs. In fact, an FRA can be viewed as a special case of a swap in which there .

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Question 6

For swaps with maturities of less than five years, the swap spread is driven by rates in the Eurodollar CD futures market, but for swaps with maturities greater than five years, the spread is determined primarily by the credit spreads in the corporate bond market.

(True/False)

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Question 7

If the FRA has a of 5% for three-month LIBOR (the ) and the notional amount is for $10 million, the buyer is agreeing to pay 5% to buy or borrow $10 million at the settlement date and the seller is agreeing to receive 5% to sell or lend $10 million at the settlement date.

(Multiple Choice)

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Question 8

the over-the-counter equivalent of the exchange-traded on short-term rates. Typically, the short-term rate is .

(Multiple Choice)

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Question 9

An interest rate floor can be used by a depository institution to lock in an interest rate spread over its cost of funds but maintain the opportunity to benefit if rates decline.

(True/False)

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Question 10

The terms of an interest rate agreement include ________.

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Question 11

Which of the below statements is FALSE?

(Multiple Choice)

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Question 12

In addition to interest rate swaps, there exist currency swaps and interest rate / equity swaps.

(True/False)

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Question 13

An an agreement whereby two parties (called counterparties) agree to exchange .

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Question 14

There are two types of swaptions - a payer swaption and a receiver swaption. Describe each of these two types of swaptions.

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Question 15

It is important to note the difference of who benefits when interest rates move in an FRA and an interest rate futures contract. The buyer of an FRA benefits if the reference rate increases and the seller benefits if the reference rate decreases. In a futures contract, the buyer benefits from a falling rate while the seller benefits from a rising rate.

(True/False)

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Question 16

Assume the following terms for an FRA: Reference rate is three-month LIBOR, the contract rate is 5.5%, the notional amount is for $10 million, and the number of days to settlement is 91 days. If the settlement rate is 6.25%, what is interest differential?

(Multiple Choice)

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Question 17

The buyer of a fixed-rate asset can use an interest rate floor to establish a lower bound on its investment return, yet retain the opportunity to benefit should rates increase.

(True/False)

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Question 18

There are three general types of transactions in the secondary market for swaps. These include (1) a swap reversal, (2) a swap sale (or assignment), and (3) a swap buy-back (or close-out or cancellation). Describe a swap reversal.

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Question 19

In regards to an interest rate / equity swap, which of the below statements is TRUE?

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Question 20

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Exam 30: OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

In comparing a swap to a futures or forward contract where the underlying is an interest rate instrument such as a Eurodollar CD, which of the below statements is FALSE?

If at the settlement date the settlement rate is ________ the contract rate, the FRA buyer ________ because the buyer can borrow funds at a below-market rate.

What is a forward rate agreement (FRA)? Describe the elements associated with an FRA.

There are two ways that a swap position can be interpreted. Which of the below is ONE of these?

Which of the below statements is FALSE?

A ________ can be viewed as a package of FRAs. In fact, an FRA can be viewed as a special case of a swap in which there ________.

For swaps with maturities of less than five years, the swap spread is driven by rates in the Eurodollar CD futures market, but for swaps with maturities greater than five years, the spread is determined primarily by the credit spreads in the corporate bond market.

If the FRA has a ________ of 5% for three-month LIBOR (the ________) and the notional amount is for $10 million, the buyer is agreeing to pay 5% to buy or borrow $10 million at the settlement date and the seller is agreeing to receive 5% to sell or lend $10 million at the settlement date.

________ the over-the-counter equivalent of the exchange-traded ________ on short-term rates. Typically, the short-term rate is ________.

An interest rate floor can be used by a depository institution to lock in an interest rate spread over its cost of funds but maintain the opportunity to benefit if rates decline.

The terms of an interest rate agreement include ________.

Which of the below statements is FALSE?

In addition to interest rate swaps, there exist currency swaps and interest rate / equity swaps.

An ________ an agreement whereby two parties (called counterparties) agree to exchange ________.

There are two types of swaptions - a payer swaption and a receiver swaption. Describe each of these two types of swaptions.

Assume the following terms for an FRA: Reference rate is three-month LIBOR, the contract rate is 5.5%, the notional amount is for $10 million, and the number of days to settlement is 91 days. If the settlement rate is 6.25%, what is interest differential?

The buyer of a fixed-rate asset can use an interest rate floor to establish a lower bound on its investment return, yet retain the opportunity to benefit should rates increase.

There are three general types of transactions in the secondary market for swaps. These include (1) a swap reversal, (2) a swap sale (or assignment), and (3) a swap buy-back (or close-out or cancellation). Describe a swap reversal.

In regards to an interest rate / equity swap, which of the below statements is TRUE?

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

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If at the settlement date the settlement rate is the contract rate, the FRA buyer because the buyer can borrow funds at a below-market rate.

A can be viewed as a package of FRAs. In fact, an FRA can be viewed as a special case of a swap in which there .

If the FRA has a of 5% for three-month LIBOR (the ) and the notional amount is for $10 million, the buyer is agreeing to pay 5% to buy or borrow $10 million at the settlement date and the seller is agreeing to receive 5% to sell or lend $10 million at the settlement date.

the over-the-counter equivalent of the exchange-traded on short-term rates. Typically, the short-term rate is .

An an agreement whereby two parties (called counterparties) agree to exchange .