Question 1

In order to reduce interest rate swap risk exposures,a financial intermediary may:

Accepted Answer

A)  practise marking-to market. 
B)  use margin calls. 
C)  ask for security collateral. 
D)  do all of the given answers. 
A)  practise marking-to market. 
B)  use margin calls. 
C)  ask for security collateral. 
D)  do all of the given answers. D

Question 2

An interest rate swap in which the notional principal declines over time is called a/an:

Accepted Answer

A)  amortised swap. 
B)  term swap. 
C)  zero-coupon swap. 
D)  none of the given choices. 
A)  amortised swap. 
B)  term swap. 
C)  zero-coupon swap. 
D)  none of the given choices. A

Question 3

If two firms have the following cost of borrowing,what is the net differential for an interest rate swap?
Firm A:
Fixed rate 10.8% per annum; floating rate BBSW+0.3% per annum
Firm B:
Fixed rate 11.6% per annum; floating rate BBSW+1.7% per annum

Accepted Answer

A)  2.2% 
B)  1.4% 
C)  0.7% 
D)  0.6% 
A)  2.2% 
B)  1.4% 
C)  0.7% 
D)  0.6% D

Question 4

An interest rate swap in which all the fixed payments are paid in one lump sum is called a/an:

Accepted Answer

A)  amortised swap. 
B)  term swap. 
C)  zero-coupon swap. 
D)  none of the given choices. 
A)  amortised swap. 
B)  term swap. 
C)  zero-coupon swap. 
D)  none of the given choices.

Question 5

When two parties do a cross-currency swap involving floating rate interest payments in one currency and fixed interest rate payments denominated in another currency,the cash flows involved vary as the exchange rate changes.

Accepted Answer

A) True 
 B)False

Question 6

If a company that had a fixed-rate liability wanted to achieve a floating-rate cost of funds through a swap,it would pay a:

Accepted Answer

A)  fixed rate to the counterparty and receive a floating rate in return from the counterparty. 
B)  floating rate to the counterparty and pay a floating rate to the fixed-rate lender. 
C)  floating rate to the counterparty and pay a fixed rate to the fixed-rate lender. 
D)  floating rate to the counterparty and receive a fixed rate in return from the counterparty. 
A)  fixed rate to the counterparty and receive a floating rate in return from the counterparty. 
B)  floating rate to the counterparty and pay a floating rate to the fixed-rate lender. 
C)  floating rate to the counterparty and pay a fixed rate to the fixed-rate lender. 
D)  floating rate to the counterparty and receive a fixed rate in return from the counterparty.

Question 7

When the normal relationship between fixed and floating interest rates alters in an interest rate swap,this risk is called:

Accepted Answer

A)  basis risk. 
B)  exchange risk. 
C)  mismatch risk. 
D)  front-end risk. 
A)  basis risk. 
B)  exchange risk. 
C)  mismatch risk. 
D)  front-end risk.

Question 8

In an interest rate swap,______ gains/gain when the three-month BBSW rises.

Accepted Answer

A)  the floating-rate payer 
B)  the fixed-rate payer 
C)  both floating- and fixed-rate payers 
D)  neither floating- nor fixed-rate payers 
A)  the floating-rate payer 
B)  the fixed-rate payer 
C)  both floating- and fixed-rate payers 
D)  neither floating- nor fixed-rate payers

Question 9

Which of the following is NOT an advantage of having an interest rate swap market?

Accepted Answer

A)  As it is generally liquid, it benefits both borrowers and lenders. 
B)  As most swaps involve banks, their credit departments can carry out credit assessments more easily than potential lenders. 
C)  As the banks are involved in most swaps, banks require a spread between the two interest rates. 
D)  Swaps enable companies to carry out regulatory and tax arbitrage. 
A)  As it is generally liquid, it benefits both borrowers and lenders. 
B)  As most swaps involve banks, their credit departments can carry out credit assessments more easily than potential lenders. 
C)  As the banks are involved in most swaps, banks require a spread between the two interest rates. 
D)  Swaps enable companies to carry out regulatory and tax arbitrage.

Question 10

If the exchange rate alters during the lifetime of a cross-currency swap,this:

Accepted Answer

A)  has no impact as all FX risk has been eliminated. 
B)  will impact only on the interest payments during the swap's lifetime. 
C)  will impact only when the principal amounts are re-exchanged at maturity. 
D)  will impact on both interest payments and principal repayments. 
A)  has no impact as all FX risk has been eliminated. 
B)  will impact only on the interest payments during the swap's lifetime. 
C)  will impact only when the principal amounts are re-exchanged at maturity. 
D)  will impact on both interest payments and principal repayments.

Question 11

When a financial intermediary is involved as an interest rate swap counterparty,it often seeks to arrange an offsetting swap called a:

Accepted Answer

A)  counterparty swap. 
B)  simultaneous swap. 
C)  synchronised swap. 
D)  matched swap. 
A)  counterparty swap. 
B)  simultaneous swap. 
C)  synchronised swap. 
D)  matched swap.

Question 12

A financial agreement between two parties to exchange a series of cash flows similar to those resulting from an exchange of different types of bonds is called a/an:

Accepted Answer

A)  credit swap. 
B)  interest rate swap. 
C)  yield curve swap. 
D)  notional spread. 
A)  credit swap. 
B)  interest rate swap. 
C)  yield curve swap. 
D)  notional spread.

Question 13

Which of the following is considered a factor on the supply side in the growth of the swaps market?

Accepted Answer

A)  Interest rate swaps provide a linkage between segmented markets. 
B)  Interest rate swaps can minimise the costs of regulation and tax laws. 
C)  The efficiency and technology of financial intermediaries in providing risk management. 
D)  All of the given answers. 
A)  Interest rate swaps provide a linkage between segmented markets. 
B)  Interest rate swaps can minimise the costs of regulation and tax laws. 
C)  The efficiency and technology of financial intermediaries in providing risk management. 
D)  All of the given answers.

Question 14

In an interest rate swap,the party who is the fixed-rate payer:

Accepted Answer

A)  currently has fixed-rate obligations, but prefers floating. 
B)  currently has floating-rate obligations, but prefers fixed. 
C)  receives a fixed-rate payment if interest rates increase. 
D)  pays a floating-rate payment if interest rates increase. 
A)  currently has fixed-rate obligations, but prefers floating. 
B)  currently has floating-rate obligations, but prefers fixed. 
C)  receives a fixed-rate payment if interest rates increase. 
D)  pays a floating-rate payment if interest rates increase.

Question 15

If a company with a fixed-rate debt of 11% enters into a swap and pays floating-rate debt of BBSW+1.20% and receives fixed-rate payments of 9%,its net cost of debt becomes:

Accepted Answer

A)  11% 
B)  BBSW+0.20% 
C)  BBSW+2.20% 
D)  12% 
A)  11% 
B)  BBSW+0.20% 
C)  BBSW+2.20% 
D)  12%

Question 16

While both the international and AUD swap markets have matured,growth may still be expected.Which of the following factors is a determinant in the future growth of the swaps markets?

Accepted Answer

A)  Periodic nervousness from a lack of clear direction of interest rates 
B)  Speculative trading transactions to take advantage of future price movements 
C)  Development of new, sophisticated products to hedge interest rate and currency risk 
D)  All of the given choices 
A)  Periodic nervousness from a lack of clear direction of interest rates 
B)  Speculative trading transactions to take advantage of future price movements 
C)  Development of new, sophisticated products to hedge interest rate and currency risk 
D)  All of the given choices

Question 17

Because interest rate swaps are off-balance-sheet transactions for an intermediary,they:

Accepted Answer

A)  only involve receiving deposits. 
B)  only involve lending funds. 
C)  are not involved in capital adequacy requirements. 
D)  are involved in capital adequacy requirements. 
A)  only involve receiving deposits. 
B)  only involve lending funds. 
C)  are not involved in capital adequacy requirements. 
D)  are involved in capital adequacy requirements.

Question 18

If one company has better access to fixed-term financing than another company,it may be said that this company has a _____ than the other company.

Accepted Answer

A)  lower credit rating 
B)  comparative advantage 
C)  greater market share 
D)  higher credit risk 
A)  lower credit rating 
B)  comparative advantage 
C)  greater market share 
D)  higher credit risk

Question 19

Using the data below,calculate the fixed interest rate payable by company B in the swap transaction.

Accepted Answer

A)  11.075% per annum 
B)  11.275% per annum 
C)  11.325% per annum 
D)  11.550% per annum 
A)  11.075% per annum 
B)  11.275% per annum 
C)  11.325% per annum 
D)  11.550% per annum

Question 20

The main type of interest rate:

Accepted Answer

A)  is a direct swap between two parties. 
B)  is known as a vanilla swap. 
C)  is a basis swap. 
D)  involves a swap of floating for floating interest payments. 
A)  is a direct swap between two parties. 
B)  is known as a vanilla swap. 
C)  is a basis swap. 
D)  involves a swap of floating for floating interest payments.

Exam 21: Interest Rate Swaps, Cross-Currency Swaps and Credit Default

In order to reduce interest rate swap risk exposures,a financial intermediary may:

An interest rate swap in which the notional principal declines over time is called a/an:

If two firms have the following cost of borrowing,what is the net differential for an interest rate swap? Firm A: Fixed rate 10.8% per annum; floating rate BBSW+0.3% per annum Firm B: Fixed rate 11.6% per annum; floating rate BBSW+1.7% per annum

An interest rate swap in which all the fixed payments are paid in one lump sum is called a/an:

When two parties do a cross-currency swap involving floating rate interest payments in one currency and fixed interest rate payments denominated in another currency,the cash flows involved vary as the exchange rate changes.

If a company that had a fixed-rate liability wanted to achieve a floating-rate cost of funds through a swap,it would pay a:

When the normal relationship between fixed and floating interest rates alters in an interest rate swap,this risk is called:

In an interest rate swap,______ gains/gain when the three-month BBSW rises.

Which of the following is NOT an advantage of having an interest rate swap market?

If the exchange rate alters during the lifetime of a cross-currency swap,this:

When a financial intermediary is involved as an interest rate swap counterparty,it often seeks to arrange an offsetting swap called a:

A financial agreement between two parties to exchange a series of cash flows similar to those resulting from an exchange of different types of bonds is called a/an:

Which of the following is considered a factor on the supply side in the growth of the swaps market?

In an interest rate swap,the party who is the fixed-rate payer:

If a company with a fixed-rate debt of 11% enters into a swap and pays floating-rate debt of BBSW+1.20% and receives fixed-rate payments of 9%,its net cost of debt becomes:

While both the international and AUD swap markets have matured,growth may still be expected.Which of the following factors is a determinant in the future growth of the swaps markets?

Because interest rate swaps are off-balance-sheet transactions for an intermediary,they:

If one company has better access to fixed-term financing than another company,it may be said that this company has a _____ than the other company.

Using the data below,calculate the fixed interest rate payable by company B in the swap transaction.

The main type of interest rate:

A Modern Financial System: An Overview

Commercial Banks

Non-Bank Financial Institutions

The Share Market and the Corporation

Corporations Issuing Equity in the Share Market

Investors in the Share Market

Forecasting Share Price Movements

Mathematics of Finance: An Introduction to Basic Concepts and Calculations

Short-Term Debt

Medium-To-Long-Term Debt

International Debt Markets

Government Debt, monetary Policy and the Payments System

An Introduction to Interest Rate Determination and Forecasting

Interest Rate Risk

Foreign Exchange: The Structure and Operation of the Fx Market

Foreign Exchange: Factors That Influence the Exchange Rate

Foreign Exchange: Risk Identification and Management

An Introduction to Risk Management and Derivatives

Future Contracts and Forward Rate Agreements

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