Question 1

LIBOR is an acronym for

Accepted Answer

A)  Latest Interest Being Offered Rate. 
B)  Large International Bank Offered Rate. 
C)  Least Interest Bearing: Official Rate. 
D)  London Interbank Offered Rate. 
A)  Latest Interest Being Offered Rate. 
B)  Large International Bank Offered Rate. 
C)  Least Interest Bearing: Official Rate. 
D)  London Interbank Offered Rate.

Question 2

TABLE 15.1
Use the information for Polaris Corporation to answer following question(s).
Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00%
  
-Refer Table 15.1. If the LIBOR rate jumps to 5.00% after the first year what will be the all-in-cost (i.e. the internal rate of return) for Polaris for the entire loan?

Accepted Answer

A)  5.25% 
B)  5.50% 
C)  6.09% 
D)  6.58% 
A)  5.25% 
B)  5.50% 
C)  6.09% 
D)  6.58%

Question 3

Instruction 15.1:
For 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 15.1. Choosing strategy #2 will

Accepted Answer

A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period. 
A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period.

Question 4

Instruction 15.1:
For 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 15.1. 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.)

Accepted Answer

A)  Strategy #3 
B)  Strategy #2 
C)  Strategy #1 
D)  Strategy #1, #2, or #3, you are indifferent among the choices. 
A)  Strategy #3 
B)  Strategy #2 
C)  Strategy #1 
D)  Strategy #1, #2, or #3, you are indifferent among the choices.

Question 5

As a management tool, a ________ is a rule, but a ________ is an objective.

Accepted Answer

A)  policy; goal 
B)  goal; policy 
C)  FIBOR; GIBOR 
D)  none of the above 
A)  policy; goal 
B)  goal; policy 
C)  FIBOR; GIBOR 
D)  none of the above

Question 6

The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called ________.

Accepted Answer

A)  interest rate risk 
B)  credit risk 
C)  counterparty risk 
D)  clearinghouse risk 
A)  interest rate risk 
B)  credit risk 
C)  counterparty risk 
D)  clearinghouse risk

Question 7

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 8

A preferred interest rate swap strategy for a firm with variable-rate debt and that expects rates to go up is to

Accepted Answer

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

Question 9

The following would be an example of a policy, not a goal.

Accepted Answer

A)  Management shall minimize the firm's overall weighted average cost of capital. 
B)  Management shall maximize shareholder's wealth. 
C)  Management will not write uncovered options. 
D)  Management will hire only happy employees. 
A)  Management shall minimize the firm's overall weighted average cost of capital. 
B)  Management shall maximize shareholder's wealth. 
C)  Management will not write uncovered options. 
D)  Management will hire only happy employees.

Question 10

TABLE 15.2
Use the information to answer following question(s).
  
-Refer to Table 15.2. Which of the following are viable rates for the swap agreements with Barclay's Bank by Shell and Merck?

Accepted Answer

A)  Shell borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Shell variable LIBOR + 1% while Shell pays Barclay's fixed 7 1/4%. At the same time, Merck borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Merck 6.00% while Merck pays Barclay's LIBOR plus 1/4%. 
B)  Merck borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Merck variable LIBOR + 1% while Merck pays Barclay's fixed 7 1/4%. At the same time, Shell borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%. 
C)  Merck borrows at a fixed rate of 7.5% and enters into a swap with Barclay's that pays Merck variable LIBOR + 1% while Merck pays Barclay's fixed 7 1/4%. At the same time, Shell borrows at the variable rate of LIBOR + 1/2% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%. 
D)  Merck borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Merck a fixed rate of 7% while Merck pays Barclay's variable LIBOR +1%. At the same time, Shell borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%. 
A)  Shell borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Shell variable LIBOR + 1% while Shell pays Barclay's fixed 7 1/4%. At the same time, Merck borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Merck 6.00% while Merck pays Barclay's LIBOR plus 1/4%. 
B)  Merck borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Merck variable LIBOR + 1% while Merck pays Barclay's fixed 7 1/4%. At the same time, Shell borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%. 
C)  Merck borrows at a fixed rate of 7.5% and enters into a swap with Barclay's that pays Merck variable LIBOR + 1% while Merck pays Barclay's fixed 7 1/4%. At the same time, Shell borrows at the variable rate of LIBOR + 1/2% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%. 
D)  Merck borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Merck a fixed rate of 7% while Merck pays Barclay's variable LIBOR +1%. At the same time, Shell borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%.

Question 11

A U.S.-based firm with dollar denominated debt, but continuing sales denominated in Japanese yen, could

Accepted Answer

A)  purchase an interest rate cap agreement. 
B)  enter into a swap agreement to swap dollar interest for Japanese interest payments. 
C)  purchase a series of rolling futures contracts to buy Japanese yen forward. 
D)  all of the above. 
A)  purchase an interest rate cap agreement. 
B)  enter into a swap agreement to swap dollar interest for Japanese interest payments. 
C)  purchase a series of rolling futures contracts to buy Japanese yen forward. 
D)  all of the above.

Question 12

Instruction 15.1:
For 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 15.1. 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.

Question 13

Over the last decade floating-rate notes have decreased in both total volume and percentage of total dollar-denominated bond issuances.

Accepted Answer

A) True 
 B)False

Question 14

A firm entering into a currency or interest rate swap agreement is relieved of the ultimate responsibility for the timely servicing of its own debt obligations.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

Corporate treasury departments have traditionally been

Accepted Answer

A)  profit centers. 
B)  centers of aggressive profit taking. 
C)  service or cost centers. 
D)  none of the above. 
A)  profit centers. 
B)  centers of aggressive profit taking. 
C)  service or cost centers. 
D)  none of the above.

Question 18

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

Accepted Answer

A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate. 
A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate.

Question 19

Instruction 15.1:
For 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 15.1. After the fact, under which set of circumstances would you prefer strategy #3? (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 20

OTC interest rate derivative daily turnover has declined over the last decade in part due to the threat of terrorism and high energy prices.

Accepted Answer

A) True 
 B)False

LIBOR is an acronym for

As a management tool, a is a rule, but a is an objective.

The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called ________.

A preferred interest rate swap strategy for a firm with variable-rate debt and that expects rates to go up is to

The following would be an example of a policy, not a goal.

TABLE 15.2 Use the information to answer following question(s). -Refer to Table 15.2. Which of the following are viable rates for the swap agreements with Barclay's Bank by Shell and Merck?

A U.S.-based firm with dollar denominated debt, but continuing sales denominated in Japanese yen, could

Over the last decade floating-rate notes have decreased in both total volume and percentage of total dollar-denominated bond issuances.

A firm entering into a currency or interest rate swap agreement is relieved of the ultimate responsibility for the timely servicing of its own debt obligations.

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

The single largest interest rate risk of a firm is ________.

Corporate treasury departments have traditionally been

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

OTC interest rate derivative daily turnover has declined over the last decade in part due to the threat of terrorism and high energy prices.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

Exam 15: Interest Rate and Currency Swaps

LIBOR is an acronym for

As a management tool, a ________ is a rule, but a ________ is an objective.

The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called ________.

A preferred interest rate swap strategy for a firm with variable-rate debt and that expects rates to go up is to

The following would be an example of a policy, not a goal.

TABLE 15.2 Use the information to answer following question(s). -Refer to Table 15.2. Which of the following are viable rates for the swap agreements with Barclay's Bank by Shell and Merck?

A U.S.-based firm with dollar denominated debt, but continuing sales denominated in Japanese yen, could

Over the last decade floating-rate notes have decreased in both total volume and percentage of total dollar-denominated bond issuances.

A firm entering into a currency or interest rate swap agreement is relieved of the ultimate responsibility for the timely servicing of its own debt obligations.

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

The single largest interest rate risk of a firm is ________.

Corporate treasury departments have traditionally been

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

OTC interest rate derivative daily turnover has declined over the last decade in part due to the threat of terrorism and high energy prices.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

As a management tool, a is a rule, but a is an objective.