Question 1

Find the QSD.

Accepted Answer

A)  0% 
B)  0.5% 
C)  0.8% 
D)  1% 
A)  0% 
B)  0.5% 
C)  0.8% 
D)  1% D

Question 2

The term interest rate swaps:

Accepted Answer

A)  refers to a "single-currency interest rate swap" shortened to "interest rate swap". 
B)  involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals. 
C)  can be "fixed-for-floating rate" or "fixed-for-fixed rate". 
D)  All of these. 
A)  refers to a "single-currency interest rate swap" shortened to "interest rate swap". 
B)  involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals. 
C)  can be "fixed-for-floating rate" or "fixed-for-fixed rate". 
D)  All of these. D

Question 3

$\begin{array}{lll}
&\text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Borrowing Cost }\
\text { Company: A} & 6 \% & \text { LIBOR } \
\text { Company: B} & 5 \% & \text { LIBOR }-0.5
\end{array}$
-Calculate the quality spread differential (QSD):

Accepted Answer

A)  0.50%. 
B)  1.00%. 
C)  1.50%. 
D)  2.00%. 
A)  0.50%. 
B)  1.00%. 
C)  1.50%. 
D)  2.00%. A

Question 4

ABC Corporation has entered into a 10-year interest rate swap with a swap bank.ABC Corp.pays the swap bank a fixed-rate of 6 percent annually on a notional amount of EUR100,000,000 and receives LIBOR - ½ percent.What is the price of the swap on the seventh reset date,assuming that the fixed-rate at which ABC can borrow has decreased to 5%.

Accepted Answer

PV of a hypothetical bond issue of EUR10

Question 5

The following information is given:
 $\begin{array}{lll}
&\text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Borrowing Cost }\
\text { X Company: } & 5 \% & \text { LIBOR } \
\text { Y Company: } & 7 \% & \text { LIBOR }+1.3
\end{array}$ Both parties want to engage in an interest rate swap.Assume that S Bank will arrange for an interest rate swap between X Company and Y Company for 0.1%.Also,assume that X Company gets 2/3 of the interest savings available.
a)Which company has a better credit rating?
b)What is the quality spread differential?
c)What is X Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
d)What is Y Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
e)Illustrate the cash flows from this swap.Assume that X Company pays LIBOR to S Bank.

Accepted Answer

a)X Company
b)QSD =

Question 6

XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SF10,000,000 and receive LIBOR - ½ percent.As of the third reset date (i.e.mid-way through the 6 year agreement),calculate the price of the swap,assuming that the fixed-rate at which XYZ can borrow has increased to 10%.(Round your final answer to nearest SF and Do not round intermediate calculations)

Accepted Answer

A)  SF248,685 
B)  SF900,000 
C)  SF2,700,000 
D)  SF7,300,000 
A)  SF248,685 
B)  SF900,000 
C)  SF2,700,000 
D)  SF7,300,000

Question 7

$\begin{array}{lll}
&\text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Borrowing Cost }\
\text { Company: A} & 6 \% & \text { LIBOR } \
\text { Company: B} & 5 \% & \text { LIBOR }-0.5
\end{array}$
-If company A and company B share the interest savings from the interest rate swap equally,company A will pay after the swap on its preferred debt:

Accepted Answer

A)  5.5%. 
B)  5.75%. 
C)  LIBOR - 0.75%. 
D)  LIBOR. 
A)  5.5%. 
B)  5.75%. 
C)  LIBOR - 0.75%. 
D)  LIBOR.

Question 8

$\begin{array}{lcc} 
&\text { Canadian interest rate }&\text {french interest rate }\
& \text { on CS loans } & \text { on euro loans } \
\text { Canadian firm } & 5 \% & 5.5 \% \mathrm{a} \
\text { Freneh firm } & 6 \% & 5.5 \%
\end{array}$
The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars.
-If the Canadian and the French firms share the interest savings from the currency swap equally,the Canadian firm will pay on its French debt after the swap:

Accepted Answer

A)  The same as without the swap. 
B)  5%. 
C)  5.5%. 
D)  6%. 
A)  The same as without the swap. 
B)  5%. 
C)  5.5%. 
D)  6%.

Question 9

The following information is given.
 $\begin{array}{lll} 
& \text { Fixed Rate } \$(\%) & \text { Floating Rate Euro (\%) } \
\text { Boeing } & 5.5 \% & \text { LIBOR }+0.25 \% \
\text { Airbus } & 5.7 \% & \text { LIBOR }+0.05 \%
\end{array}$ Boeing and Airbus have agreed to swap their debt payments so that each firm gets its preferred debt terms.Each firm will save the same amount in percentage terms.
a)Does Boeing prefer fixed or floating rate debt? What rate does it pay on its preferred debt?
b)Does Airbus prefer fixed or floating rate debt? What rate does it pay on its preferred debt?
c)What are the total interest savings available in this interest rate swap?
d)Which company has the advantage in fixed rate debt?

Accepted Answer

a)Boeing prefers floating and

Question 10

Swap bank quotes 5.40-5.70 for the euro.This means the swap bank will:

Accepted Answer

A)  receive 5.40 percent semi-annual fixed payments against paying six-month LIBOR. 
B)  receive 5.70 percent semi-annual fixed payments against paying six-month LIBOR. 
C)  pay 5.70 percent semi-annual fixed payments against receiving six-month LIBOR. 
D)  None of these. 
A)  receive 5.40 percent semi-annual fixed payments against paying six-month LIBOR. 
B)  receive 5.70 percent semi-annual fixed payments against paying six-month LIBOR. 
C)  pay 5.70 percent semi-annual fixed payments against receiving six-month LIBOR. 
D)  None of these.

Question 11

$\begin{array}{lll}
&\text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Borrowing Cost }\
\text { Company: A} & 6 \% & \text { LIBOR } \
\text { Company: B} & 5 \% & \text { LIBOR }-0.5
\end{array}$
-What rate would company A have to pay on its floating rate debt so that an interest rate swap would no longer benefit each party?

Accepted Answer

A)  LIBOR - 0.5 
B)  LIBOR 
C)  LIBOR + 0.5 
D)  An interest swap is always beneficial for both parties involved. 
A)  LIBOR - 0.5 
B)  LIBOR 
C)  LIBOR + 0.5 
D)  An interest swap is always beneficial for both parties involved.

Question 12

Which of the following are possible swaps?

Accepted Answer

A)  Floating-for-floating. 
B)  Zero-coupon for floating. 
C)  Fixed for floating. 
D)  All of these. 
A)  Floating-for-floating. 
B)  Zero-coupon for floating. 
C)  Fixed for floating. 
D)  All of these.

Question 13

Company A swaps fixed-rate US dollar debt with Company B for floating-rate Canadian dollar debt.This is a:

Accepted Answer

A)  single-currency interest rate swap. 
B)  currency swap. 
C)  cross-currency interest rate swap. 
D)  None of these. 
A)  single-currency interest rate swap. 
B)  currency swap. 
C)  cross-currency interest rate swap. 
D)  None of these.

Question 14

Canada Corporation enters into a 2-year interest rate swap with Bank A in which it agrees to pay the swap bank a fixed-rate of 5 percent annually on a notional amount of US$1,000,000 and receive LIBOR - 1 percent.Determine the price of the swap on the first reset date,assuming that the fixed-rate at which Canada Corporation can borrow has stayed unchanged.

Accepted Answer

PV of a hypothetical bond issu

Question 15

Which combination of the following statements is true about the risks that a swap dealer confronts:
(i)- interest rate risk
(ii)- basis risk
(iii)- exchange rate risk
(iv)- mismatch risk
(v)- sovereign risk

Accepted Answer

A)  (i), (ii), (iii), and (v) 
B)  (i), (iii), and (iv) 
C)  (iii), (iv), and (iv) 
D)  (i), (ii), (iii), (iv), and (v) 
A)  (i), (ii), (iii), and (v) 
B)  (i), (iii), and (iv) 
C)  (iii), (iv), and (iv) 
D)  (i), (ii), (iii), (iv), and (v)

Question 16

$\begin{array}{lcc} 
&\text { Canadian interest rate }&\text {french interest rate }\
& \text { on CS loans } & \text { on euro loans } \
\text { Canadian firm } & 5 \% & 5.5 \% \mathrm{a} \
\text { Freneh firm } & 6 \% & 5.5 \%
\end{array}$
The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars.
-Find QSD

Accepted Answer

A)  1% 
B)  1.2% 
C)  2.2% 
D)  3.2% 
A)  1% 
B)  1.2% 
C)  2.2% 
D)  3.2%

Question 17

Find the profit of the swap bank next year if next year the exchange rate will be $1.65/£.

Accepted Answer

A)  $2000 
B)  $2500 
C)  $3000 
D)  $3500 
A)  $2000 
B)  $2500 
C)  $3000 
D)  $3500

Question 18

The primary reasons for a counterparty to use a currency swap are:

Accepted Answer

A)  to hedge and to speculate. 
B)  to play in the futures and forward markets. 
C)  to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure. 
D)  to gamble in the futures and forward markets. 
A)  to hedge and to speculate. 
B)  to play in the futures and forward markets. 
C)  to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure. 
D)  to gamble in the futures and forward markets.

Question 19

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" is/are:

Accepted Answer

A)  fixed-for-floating rate interest rate swap, where one counterparty exchanges the principal payment of a floating-rate debt obligations for fixed-rate principal payment of the other counter party. 
B)  fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in same currency. 
C)  fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating-rate debt obligations for fixed-rate interest payments of the other counter party. 
D)  None of these 
A)  fixed-for-floating rate interest rate swap, where one counterparty exchanges the principal payment of a floating-rate debt obligations for fixed-rate principal payment of the other counter party. 
B)  fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in same currency. 
C)  fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating-rate debt obligations for fixed-rate interest payments of the other counter party. 
D)  None of these

Question 20

Use the following information to calculate the quality spread differential (QSD): $\begin{array}{lll}
&\text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Borrowing Cost }\
\text { X Company: } & 10 \% & \text { LIBOR } \
\text { Y Company: } & 12 \% & \text { LIBOR }+1.5
\end{array}$

Accepted Answer

A)  0.50% 
B)  1.00% 
C)  1.50% 
D)  2.00% 
A)  0.50% 
B)  1.00% 
C)  1.50% 
D)  2.00%

Find the QSD.

The term interest rate swaps:

Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company: A 6\% LIBOR Company: B 5\% LIBOR -0.5 -Calculate the quality spread differential (QSD):

Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company: A 6\% LIBOR Company: B 5\% LIBOR -0.5 -If company A and company B share the interest savings from the interest rate swap equally,company A will pay after the swap on its preferred debt:

Swap bank quotes 5.40-5.70 for the euro.This means the swap bank will:

Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company: A 6\% LIBOR Company: B 5\% LIBOR -0.5 -What rate would company A have to pay on its floating rate debt so that an interest rate swap would no longer benefit each party?

Which of the following are possible swaps?

Company A swaps fixed-rate US dollar debt with Company B for floating-rate Canadian dollar debt.This is a:

Which combination of the following statements is true about the risks that a swap dealer confronts: (i)- interest rate risk (ii)- basis risk (iii)- exchange rate risk (iv)- mismatch risk (v)- sovereign risk

Canadian interest rate french interest rate on CS loans on euro loans Canadian firm 5\% 5.5\% Freneh firm 6\% 5.5\% The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars. -Find QSD

Find the profit of the swap bank next year if next year the exchange rate will be $1.65/£.

The primary reasons for a counterparty to use a currency swap are:

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" is/are:

Use the following information to calculate the quality spread differential (QSD): Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost X Company: 10\% LIBOR Y Company: 12\% LIBOR +1.5

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters

Exam 10: Interest Rate and Currency Swaps

Find the QSD.

The term interest rate swaps:

Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company: A 6\% LIBOR Company: B 5\% LIBOR -0.5 -Calculate the quality spread differential (QSD):

Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company: A 6\% LIBOR Company: B 5\% LIBOR -0.5 -If company A and company B share the interest savings from the interest rate swap equally,company A will pay after the swap on its preferred debt:

Swap bank quotes 5.40-5.70 for the euro.This means the swap bank will:

Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company: A 6\% LIBOR Company: B 5\% LIBOR -0.5 -What rate would company A have to pay on its floating rate debt so that an interest rate swap would no longer benefit each party?

Which of the following are possible swaps?

Company A swaps fixed-rate US dollar debt with Company B for floating-rate Canadian dollar debt.This is a:

Which combination of the following statements is true about the risks that a swap dealer confronts: (i)- interest rate risk (ii)- basis risk (iii)- exchange rate risk (iv)- mismatch risk (v)- sovereign risk

Canadian interest rate french interest rate on CS loans on euro loans Canadian firm 5\% 5.5\% Freneh firm 6\% 5.5\% The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars. -Find QSD

Find the profit of the swap bank next year if next year the exchange rate will be $1.65/£.

The primary reasons for a counterparty to use a currency swap are:

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" is/are:

Use the following information to calculate the quality spread differential (QSD): Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost X Company: 10\% LIBOR Y Company: 12\% LIBOR +1.5

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters