Question 1

Whether fixed-rate or floating-rate, a swap arrangement can be designed to be equivalent to a similar maturity bond.

Accepted Answer

A) True 
 B)False

Question 2

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 3

In the derivatives markets, the instrument with the longest potential maturity is

Accepted Answer

A) options. 
B) futures. 
C) forwards. 
D) swaps. 
E) currencies. 
A) options. 
B) futures. 
C) forwards. 
D) swaps. 
E) currencies.

Question 4

Determining the pricing of a swap agreement requires the calculation of expected one- year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

Accepted Answer

A) True 
 B)False

Question 5

The extreme growth of the swap market has raised concern about the credit risk exposures of banks engaging in this market.

Accepted Answer

A) True 
 B)False

Question 6

A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years. One-year maturity notes are currently priced at par and are paying 4.5 percent annually. Two-year maturity notes are currently priced at par and are paying 5 percent annually. The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield. What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?

Accepted Answer

A) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
B) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
C) The bank expects to earn $0.45 million in the first year, lose $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
D) The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
E) The bank will not do the swap because it has no interest rate risk exposure. 
A) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
B) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
C) The bank expects to earn $0.45 million in the first year, lose $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
D) The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
E) The bank will not do the swap because it has no interest rate risk exposure.

Question 7

A credit union 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 credit union 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 yield on assets for the credit union?

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 these. 
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 these.

Question 8

A commercial bank that acts as a swap dealer must include swap risk exposure when calculating risk-based capital requirements.

Accepted Answer

A) True 
 B)False

Question 9

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 these. 
E) None of these. 
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 these. 
E) None of these.

Question 10

A Canadian bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million. The current exchange rate is $1.50/£. The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of the year, LIBOR is 4 percent and the exchange rate is $1.50/£. What is the net payment paid or received in dollars by the Canadian bank?

Accepted Answer

A) The Canadian bank paid $12 million and received $8 million for a net payment of $4 million. 
B) The Canadian bank paid $12 million and received $10 million for a net payment of $2 million. 
C) The Canadian bank paid $12 million and received $12 million for a net receipt of $0 million. 
D) The Canadian bank paid $12 million and received $14 million for a net receipt of $2 million. 
E) The Canadian bank paid $12 million and received $16 million for a net receipt of $4 million. 
A) The Canadian bank paid $12 million and received $8 million for a net payment of $4 million. 
B) The Canadian bank paid $12 million and received $10 million for a net payment of $2 million. 
C) The Canadian bank paid $12 million and received $12 million for a net receipt of $0 million. 
D) The Canadian bank paid $12 million and received $14 million for a net receipt of $2 million. 
E) The Canadian bank paid $12 million and received $16 million for a net receipt of $4 million.

Question 11

The type of swap that is in the largest segment of the global swap market 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 12

An interest rate swap is essentially a series of forward contracts on interest rates.

Accepted Answer

A) True 
 B)False

Question 13

Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional amount of the swap.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Swaps generally have a shorter maturity than other derivative instruments.

Accepted Answer

A) True 
 B)False

Question 16

At the end of 2012, the world-wide notional value of swap agreements was less than US$400 trillion.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is NOT a reason for the credit risk on a swap to be less than the credit risk on a loan?

Accepted Answer

A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted more easily than on a loan contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Differences in credit quality between parties can be equalized through the use of standby letters of credit. 
E) All of these are reasons for swaps to have less credit risk. 
A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted more easily than on a loan contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Differences in credit quality between parties can be equalized through the use of standby letters of credit. 
E) All of these are reasons for swaps to have less credit risk.

Question 18

Which of the following is an advantage of having swap dealers?

Accepted Answer

A) They serve the function of taking the opposite side of each transaction in order to keep the swap market liquid. 
B) They reduce the search costs of finding counterparties having mirror image financing requirement. 
C) They generally guarantee swap payments over the life of the contract. 
D) They incur any costs associated with the default by replacing the defaulting party on the same terms as the original swap. 
E) All of these. 
A) They serve the function of taking the opposite side of each transaction in order to keep the swap market liquid. 
B) They reduce the search costs of finding counterparties having mirror image financing requirement. 
C) They generally guarantee swap payments over the life of the contract. 
D) They incur any costs associated with the default by replacing the defaulting party on the same terms as the original swap. 
E) All of these.

Question 19

By 2008, the insurance company AIG had more than $440 billion in credit default swaps outstanding.

Accepted Answer

A) True 
 B)False

Question 20

A bank has assets of $500,000,000 and equity of $40,000,000. The assets have an average duration of 5.5 years, and the liabilities have an average duration of 2.5 years. An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years, and the duration of a floating-rate bond that reprices annually is one year. The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000. What is the optimal number of swap contracts into which the bank should enter?

Accepted Answer

A) 2,500 contracts. 
B) 2,760 contracts. 
C) 13,800 contracts. 
D) 3,200 contracts. 
E) None of these. 
A) 2,500 contracts. 
B) 2,760 contracts. 
C) 13,800 contracts. 
D) 3,200 contracts. 
E) None of these.

Exam 24: Swaps

Whether fixed-rate or floating-rate, a swap arrangement can be designed to be equivalent to a similar maturity bond.

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.

In the derivatives markets, the instrument with the longest potential maturity is

Determining the pricing of a swap agreement requires the calculation of expected one- year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

The extreme growth of the swap market has raised concern about the credit risk exposures of banks engaging in this market.

A commercial bank that acts as a swap dealer must include swap risk exposure when calculating risk-based capital requirements.

A pure credit swap

The type of swap that is in the largest segment of the global swap market is

An interest rate swap is essentially a series of forward contracts on interest rates.

Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional amount of the swap.

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

Swaps generally have a shorter maturity than other derivative instruments.

At the end of 2012, the world-wide notional value of swap agreements was less than US$400 trillion.

Which of the following is NOT a reason for the credit risk on a swap to be less than the credit risk on a loan?

Which of the following is an advantage of having swap dealers?

By 2008, the insurance company AIG had more than $440 billion in credit default swaps outstanding.

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