Question 1

An amortizing interest-rate swap is one in which

Accepted Answer

A) The fixed interest rate in the swap declines in a specified manner over the life of the swap. 
B) The floating interest rate in the swap declines in a specified manner over the life of the swap. 
C) The notional principal amount in the swap declines in a specified manner over the life of the swap. 
D) The time-period between payments in the swap gets shorter in a specified manner. 
A) The fixed interest rate in the swap declines in a specified manner over the life of the swap. 
B) The floating interest rate in the swap declines in a specified manner over the life of the swap. 
C) The notional principal amount in the swap declines in a specified manner over the life of the swap. 
D) The time-period between payments in the swap gets shorter in a specified manner. C

Question 2

The US Treasury market day-count convention is

Accepted Answer

A) Actual/365. 
B) Actual/360. 
C) Actual/Actual. 
D) 30/360. 
A) Actual/365. 
B) Actual/360. 
C) Actual/Actual. 
D) 30/360. C

Question 3

An important difference between a floating-rate note and a fixed-rate note indexed to Libor is that

Accepted Answer

A) The return from holding a fixed-rate note over any holding period is deterministic and known because of the fixed coupon payments,whereas the similar return on a floating rate note is unknown because the coupon "floats."' 
B) The price of the floating-rate note resets to par on each coupon/reset rate,whereas that of the fixed-rate note does not necessarily do so. 
C) The price of the fixed-rate note is deterministic and known because the bond pays fixed coupons whereas the floating-rate note has a fluctuating price because it pays floating interest rates. 
D) A fixed-rate note is always worth par at issue whereas the floating-rate note may not be. 
A) The return from holding a fixed-rate note over any holding period is deterministic and known because of the fixed coupon payments,whereas the similar return on a floating rate note is unknown because the coupon "floats."' 
B) The price of the floating-rate note resets to par on each coupon/reset rate,whereas that of the fixed-rate note does not necessarily do so. 
C) The price of the fixed-rate note is deterministic and known because the bond pays fixed coupons whereas the floating-rate note has a fluctuating price because it pays floating interest rates. 
D) A fixed-rate note is always worth par at issue whereas the floating-rate note may not be. A

Question 4

If the (1,1.5)-year forward rate is lognormal with volatility $\sigma = 0.15$ ,and the one-year spot rate is 4%,what is the NPV of a $100,000-notional $12 \times 18$ -FRA at a 5% strike rate if the (1,1.5)-year forward rate is 6%,as seen from the buyer's point of view? (Assume the Black model applies for interest-rate options. )

Accepted Answer

A)  $- \$ 470.88$ 
B) $0 
C) $475.61 
D) $480.39 
A)  $- \$ 470.88$ 
B) $0 
C) $475.61 
D) $480.39

Question 5

Consider the following table of prices of five-year semi-annual pay caps and floors: $$\begin{array} { | c | c | c | } 
\hline \text { Strike (\%/9) } & \text { Cap price } & \text { Floor price } \
\hline 4 \% & 2.50 & 0.50 \
\hline 5 \% & 1.50 & 1.50 \
\hline 6 \% & 0.50 & 2.50 \
\hline
\end{array}$$ Assume that the caps and floors also include the first payment in 6 months,so there are 10 payment dates in each instrument.The quoted prices of the caps and floors includes this first payment for which the floating leg has already been set.What is the fixed-rate on a five-year fairly priced swap?

Accepted Answer

A) 4% 
B) 5% 
C) 6% 
D) Not possible to determine from the available information. 
A) 4% 
B) 5% 
C) 6% 
D) Not possible to determine from the available information.

Question 6

A bank makes long-term fixed-rate loans,and funds itself with short-term deposits.It can best manage its vulnerability to interest rate changes by

Accepted Answer

A) Entering into a basis (floating-floating)swap. 
B) Entering into a pay-floating/receive-fixed interest rate swap. 
C) Entering into a pay-fixed/receive-floating interest rate swap. 
D) Entering into a fixed-fixed swap where the two legs have different payment frequencies. 
A) Entering into a basis (floating-floating)swap. 
B) Entering into a pay-floating/receive-fixed interest rate swap. 
C) Entering into a pay-fixed/receive-floating interest rate swap. 
D) Entering into a fixed-fixed swap where the two legs have different payment frequencies.

Question 7

Firm A can borrow at 4% fixed or in the floating-rate market at Libor flat.Firm B can borrow at 7% fixed or at Libor $+ 100$ bps.A wants to borrow floating and B fixed. Suppose that to reduce financing costs,A borrows fixed,B borrows floating,and they enter into an interest-rate swap.Which of the following statements is valid?

Accepted Answer

A) The combined improvement in cost of financing to A and B with the swap is always equal to the difference between the fixed rate differential (between A and 
B) and the floating rate differential which in this case is 200 basis points. 
B) The combined improvement in cost of financing to A and B with the swap is always equal to the floating rate differential,which in this case is 100 basis points. 
C) The combined improvement in cost of financing to A and B with the swap depends on the negotiated fixed rate on the swap between the two counterparties. 
D) No improvement in combined financing costs is possible-what one party gains in financing costs,the other party loses. 
A) The combined improvement in cost of financing to A and B with the swap is always equal to the difference between the fixed rate differential (between A and 
B) and the floating rate differential which in this case is 200 basis points. 
B) The combined improvement in cost of financing to A and B with the swap is always equal to the floating rate differential,which in this case is 100 basis points. 
C) The combined improvement in cost of financing to A and B with the swap depends on the negotiated fixed rate on the swap between the two counterparties. 
D) No improvement in combined financing costs is possible-what one party gains in financing costs,the other party loses.

Question 8

You enter into a $100 million notional swap to pay six-month Libor and receive 6%.Payment dates are semi-annual on both legs.The last payment date was March 25 and the next payment date is September 25.Floating payments are based on the USD money-market convention,and fixed payments are based on the 30/360 convention.If the floating rate was reset to 6% on March 25,what is the net amount you will receive on September 25?

Accepted Answer

A) 0. 
B) -$66,667. 
C) +$66,667 
D) +133,333 
A) 0. 
B) -$66,667. 
C) +$66,667 
D) +133,333

Question 9

You enter into a $100 million notional swap to pay six-month Libor and receive $x$ %.Payment dates are semi-annual on both legs.The last payment date was March 25 and the next payment date is September 25.Floating payments are based on the USD money-market convention,and fixed payments are based on the 30/360 convention.If the floating rate was reset to 6% on March 25,what must be the minimum value of $x$ that ensures you will receive a positive net payment on September 25?

Accepted Answer

A) 5.87% 
B) 5.95% 
C) 6.00% 
D) 6.01% 
A) 5.87% 
B) 5.95% 
C) 6.00% 
D) 6.01%

Question 10

Consider a $100 five-year zero-coupon swap to pay fixed and receive floating.The five-year spot rate is 5% expressed with semi-annual compounding.The floating leg makes payments every six months indexed to Libor.What is the final payment on the fixed leg of this swap?

Accepted Answer

A) $78 
B) $100 
C) $125 
D) $128 
A) $78 
B) $100 
C) $125 
D) $128

Question 11

You have entered into a swap where you receive the fixed rate and pay the floating rate.What is the best way to hedge interest-rate risk in this swap from among the following choices?

Accepted Answer

A) Add a long position in fixed rate bonds. 
B) Add a short position in interest-rate futures. 
C) Add a basis (i.e. ,floating-floating)swap. 
D) Add a short position in FRAs. 
A) Add a long position in fixed rate bonds. 
B) Add a short position in interest-rate futures. 
C) Add a basis (i.e. ,floating-floating)swap. 
D) Add a short position in FRAs.

Question 12

You have sold a $10,000 notional cap consisting of a single caplet with a strike of 6% for a six-month underlying period.All interest rates are computed based on the 30/360 convention.At maturity of the cap period,the underlying interest rate is 7%.What is the net cash flow to you on maturity?

Accepted Answer

A)  $- \$ 50.00$ 
B)  $+ \$ 48.31$ 
C)  $- \$ 48.31$ 
D)  $+ \$ 46.73$ 
A)  $- \$ 50.00$ 
B)  $+ \$ 48.31$ 
C)  $- \$ 48.31$ 
D)  $+ \$ 46.73$

Question 13

Which of the following is not true of a standard floating-rate note on a coupon reset date?

Accepted Answer

A) The next coupon payment is set based on prevailing market rates. 
B) The principal is unchanged. 
C) The ex-coupon price (the price of the note not including the coupon immediately due)of the note is par. 
D) The cum-coupon price (the price of the note including the coupon immediately due)is par. 
A) The next coupon payment is set based on prevailing market rates. 
B) The principal is unchanged. 
C) The ex-coupon price (the price of the note not including the coupon immediately due)of the note is par. 
D) The cum-coupon price (the price of the note including the coupon immediately due)is par.

Question 14

The main difference between the "short-form" and "forward" methods of pricing a floating-rate note is:

Accepted Answer

A) The short-form method is a computational short cut that is correct on average but may yield higher or lower prices than the forward method. 
B) The short-form method always works well whereas the forward method works well if interest rates are deterministic but not if they are stochastic. 
C) The short-form method requires knowledge of the term-structure of interest rates only out to the next coupon payment whereas the forward method requires knowledge of the entire interest-rate curve out to the maturity of the bond. 
D) The short-form method results in too high a price (relative to the forward method)if the term-structure of interest rates is downward sloping,and too low a price if it is downward sloping. 
A) The short-form method is a computational short cut that is correct on average but may yield higher or lower prices than the forward method. 
B) The short-form method always works well whereas the forward method works well if interest rates are deterministic but not if they are stochastic. 
C) The short-form method requires knowledge of the term-structure of interest rates only out to the next coupon payment whereas the forward method requires knowledge of the entire interest-rate curve out to the maturity of the bond. 
D) The short-form method results in too high a price (relative to the forward method)if the term-structure of interest rates is downward sloping,and too low a price if it is downward sloping.

Question 15

The US swap market convention,that is used to compute the fixed payments in a USD swap,is

Accepted Answer

A) Actual/365. 
B) Actual/360. 
C) Actual/Actual. 
D) 30/360. 
A) Actual/365. 
B) Actual/360. 
C) Actual/Actual. 
D) 30/360.

Question 16

In a plain vanilla fixed-for-floating swap,

Accepted Answer

A) Fixed payments and floating payments must be made on the same date. 
B) Fixed payments and floating payments may follow different payment cycles. 
C) Fixed payments are made semi-annually while floating payments are quarterly. 
D) Fixed payments are known ahead of time while the floating payment due on a particular date gets to be known only on that date. 
A) Fixed payments and floating payments must be made on the same date. 
B) Fixed payments and floating payments may follow different payment cycles. 
C) Fixed payments are made semi-annually while floating payments are quarterly. 
D) Fixed payments are known ahead of time while the floating payment due on a particular date gets to be known only on that date.

Question 17

Which of the following is not an interest-rate swap?

Accepted Answer

A) A fixed-for-floating swap involving exchange of fixed interest rate payments in one currency for floating payments in the same currency but in which the swap NPV at inception is non-zero. 
B) A floating-for-floating swap in which one floating rate in a currency is exchanged for another floating rate in the same currency. 
C) A fixed-for-floating swap in which a fixed interest rate payment in one currency is exchanged for floating interest-rate payments in another currency. 
D) A fixed-for-floating swap involving exchange of fixed interest rate payments in one currency for floating payments in the same currency but in which the payments are computed on principal that is reduced in a pre-specified manner during the life of the swap. 
A) A fixed-for-floating swap involving exchange of fixed interest rate payments in one currency for floating payments in the same currency but in which the swap NPV at inception is non-zero. 
B) A floating-for-floating swap in which one floating rate in a currency is exchanged for another floating rate in the same currency. 
C) A fixed-for-floating swap in which a fixed interest rate payment in one currency is exchanged for floating interest-rate payments in another currency. 
D) A fixed-for-floating swap involving exchange of fixed interest rate payments in one currency for floating payments in the same currency but in which the payments are computed on principal that is reduced in a pre-specified manner during the life of the swap.

Question 18

You have a $50 cash flow that is to be received 1.3 years from now.The one-year zero-coupon rate is 6% and the one-and-a-half-year zero-coupon rate is 7%,both in continuously-compounded and annualized terms.If you preserve net present value and duration risk,how would you allocate the cash flow into two equivalent cash flows in the one-year and one-and-a-half-year buckets?

Accepted Answer

A) 18.23 and 32.01 
B) 19.47 and 30.54 
C) 19.54 and 30.46 
D) 20.00 and 30.00 
A) 18.23 and 32.01 
B) 19.47 and 30.54 
C) 19.54 and 30.46 
D) 20.00 and 30.00

Question 19

An equivalent description of the holding of a receive-floating pay-fixed swap is as follows:

Accepted Answer

A) An exchange of a long position in a fixed-rate bond for a short position in a floating-rate note. 
B) A portfolio of long positions in forward-rate agreements (FRAs)for each swap payment date,all at the same fixed rate as the swap. 
C) A bond that pays the fixed rate minus the floating rate each period. 
D) All of the above. 
A) An exchange of a long position in a fixed-rate bond for a short position in a floating-rate note. 
B) A portfolio of long positions in forward-rate agreements (FRAs)for each swap payment date,all at the same fixed rate as the swap. 
C) A bond that pays the fixed rate minus the floating rate each period. 
D) All of the above.

Question 20

Which of the following isnot true of a swaption,i.e. ,an option on a swap?

Accepted Answer

A) A swaption is always less valuable than the underlying swap. 
B) A swaption's value is always non-negative. 
C) A payer swaption is worth less than a cap with caplets on the same dates as the swap underlying the swaption. 
D) A swaption's value increases with interest rate volatility irrespective of which side of the underlying swap one may be on. 
A) A swaption is always less valuable than the underlying swap. 
B) A swaption's value is always non-negative. 
C) A payer swaption is worth less than a cap with caplets on the same dates as the swap underlying the swaption. 
D) A swaption's value increases with interest rate volatility irrespective of which side of the underlying swap one may be on.

Exam 21: Swaps and Floating Rate Products

An amortizing interest-rate swap is one in which

The US Treasury market day-count convention is

An important difference between a floating-rate note and a fixed-rate note indexed to Libor is that

A bank makes long-term fixed-rate loans,and funds itself with short-term deposits.It can best manage its vulnerability to interest rate changes by

Consider a $100 five-year zero-coupon swap to pay fixed and receive floating.The five-year spot rate is 5% expressed with semi-annual compounding.The floating leg makes payments every six months indexed to Libor.What is the final payment on the fixed leg of this swap?

You have entered into a swap where you receive the fixed rate and pay the floating rate.What is the best way to hedge interest-rate risk in this swap from among the following choices?

You have sold a $10,000 notional cap consisting of a single caplet with a strike of 6% for a six-month underlying period.All interest rates are computed based on the 30/360 convention.At maturity of the cap period,the underlying interest rate is 7%.What is the net cash flow to you on maturity?

Which of the following is not true of a standard floating-rate note on a coupon reset date?

The main difference between the "short-form" and "forward" methods of pricing a floating-rate note is:

The US swap market convention,that is used to compute the fixed payments in a USD swap,is

In a plain vanilla fixed-for-floating swap,

Which of the following is not an interest-rate swap?

An equivalent description of the holding of a receive-floating pay-fixed swap is as follows:

Which of the following isnot true of a swaption,i.e. ,an option on a swap?

Overview

Futures Markets

Pricing Forwards and Futures I

Pricing Forwards Futures II

Hedging With Futures Forwards

Interest-Rate Forwards Futures

Options Markets

Options: Payoffs Trading Strategies

No-Arbitrage Restrictions

Early-Exercise/Put-Call Parity

Option Pricing: An Introduction

Binomial Option Pricing

Implementing the Binomial Model

The Black-Scholes Model

Mathematics of Black-Scholes

Beyond Black-Scholes

The Option Greeks

Path-Independent Exotic Options

Exotic Options II: Path-Dependent Options

Value at Risk

Equity Swaps

Currency and Commodity Swaps

Term Structure of Interest Rates: Concepts

Estimating the Yield Curve

Modeling Term Structure Movements

Factor Models of the Term Structure

The Heath-Jarrow-Morton Hjmand Libor Market Model LMM

Credit Derivative Products

Structural Models of Default Risk

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters