Question 1

A key motive for companies and financial institutions to participate in an interest rate swap is:

Accepted Answer

A)  the low information costs of swaps, compared with other financial derivatives. 
B)  to transfer interest-rate risk to parties more willing to bear it. 
C)  the greater liquidity of swaps, compared with other financial derivatives. 
D)  the favourable tax implications of swaps, compared with other financial derivatives. 
A)  the low information costs of swaps, compared with other financial derivatives. 
B)  to transfer interest-rate risk to parties more willing to bear it. 
C)  the greater liquidity of swaps, compared with other financial derivatives. 
D)  the favourable tax implications of swaps, compared with other financial derivatives.

Question 2

In relation to an interest rate swap transaction when the one of the two parties is a financial institution this is called a:

Accepted Answer

A)  bank swap. 
B)  direct swap. 
C)  intermediated swap. 
D)  credit swap. 
A)  bank swap. 
B)  direct swap. 
C)  intermediated swap. 
D)  credit swap.

Question 3

When two parties agree to exchange a set of interest rate cash flows based on a notional principal,this transaction is called:

Accepted Answer

A)  cross-hedging. 
B)  interest rate swap. 
C)  cash flow swap. 
D)  fixed-for floating swap. 
A)  cross-hedging. 
B)  interest rate swap. 
C)  cash flow swap. 
D)  fixed-for floating swap.

Question 4

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a cross call option.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements regarding a cross-currency swap is incorrect?

Accepted Answer

A)  There is an exchange of principal amounts between counterparties at the beginning and end of the swap. 
B)  The re-exchange at the conclusion of a cross-currency swap usually takes place at the initial exchange rate. 
C)  As the cross-currency swap is arranged through a bank, there is no credit risk. 
D)  Once the cross-currency swap rate is determined, cash flows are known with certainty. 
A)  There is an exchange of principal amounts between counterparties at the beginning and end of the swap. 
B)  The re-exchange at the conclusion of a cross-currency swap usually takes place at the initial exchange rate. 
C)  As the cross-currency swap is arranged through a bank, there is no credit risk. 
D)  Once the cross-currency swap rate is determined, cash flows are known with certainty.

Question 6

When a company can borrow at a fixed rate of 8% per annum and a variable rate of LIBOR + 0.60% per annum and another company can borrow at a fixed rate of 9% per annum and a variable rate of LIBOR + 0.80 a profitable vanilla swap can be arranged between them so that both their borrowing obligations can be lowered.

Accepted Answer

A) True 
 B)False

Question 7

The risk owing to a timing difference in an interest rate swap transaction,when one party defaults on a payment to another before the other realises it,is called:

Accepted Answer

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

Question 8

In relation to an interest rate swap transaction when the two parties are each entering into a swap to manage a particular interest rate risk exposure,this is called a:

Accepted Answer

A)  bank swap. 
B)  direct swap. 
C)  intermediated swap. 
D)  credit swap. 
A)  bank swap. 
B)  direct swap. 
C)  intermediated swap. 
D)  credit swap.

Question 9

In an interest rate swap,the notional principal:

Accepted Answer

A)  is the principal relating only to the fixed rate payer. 
B)  is the principal relating only to the floating rate payer. 
C)  does not receive any interest payments. 
D)  is equal to the amount of the underlying debt borrowed. 
A)  is the principal relating only to the fixed rate payer. 
B)  is the principal relating only to the floating rate payer. 
C)  does not receive any interest payments. 
D)  is equal to the amount of the underlying debt borrowed.

Question 10

If a company that had a floating-rate liability wanted to enter into a swap to achieve a fixed-rate cost of funds,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 11

The size of one basis point is:

Accepted Answer

A)  0.01 
B)  0.001 
C)  0.0001 
D)  0.00001 
A)  0.01 
B)  0.001 
C)  0.0001 
D)  0.00001

Question 12

Which of the following is a way to change the basic structure of a swap?

Accepted Answer

A)  Vary the notional principal over the lifetime of the swap. 
B)  Change the timing of when the swap begins or ends. 
C)  Reverse the swap if market conditions change. 
D)  All of the given answers are correct. 
A)  Vary the notional principal over the lifetime of the swap. 
B)  Change the timing of when the swap begins or ends. 
C)  Reverse the swap if market conditions change. 
D)  All of the given answers are correct.

Question 13

During a swap,the risk of one party not forwarding its payment while the other party does fulfil its payment obligation is called:

Accepted Answer

A)  Herstatt risk. 
B)  swap risk. 
C)  settlement risk. 
D)  repayment risk. 
A)  Herstatt risk. 
B)  swap risk. 
C)  settlement risk. 
D)  repayment risk.

Question 14

These days,the majority of swaps require a/an _______ to act as an intermediary.

Accepted Answer

A)  commercial bank 
B)  investment bank 
C)  merchant bank 
D)  Any of the given choices 
A)  commercial bank 
B)  investment bank 
C)  merchant bank 
D)  Any of the given choices

Question 15

Discuss the structure and cash-flows arrangement for the main type of interest rate swap.

Accepted Answer

The main type of interest rate swap is c

Question 16

Which of the following may be said to create a debt market environment,whereby one company may obtain a comparative interest rate advantage over another company in the fixed interest rate market,compared with the floating interest rate market?

Accepted Answer

A)  The existence of market segmentation between the fixed and floating rate markets. 
B)  Typically, fixed-rate market risk premiums are based on external credit rating agency reports. 
C)  Professional institutional lenders, such as banks and merchant banks, apply their own internal credit risk premiums. 
D)  All of the given answers. 
A)  The existence of market segmentation between the fixed and floating rate markets. 
B)  Typically, fixed-rate market risk premiums are based on external credit rating agency reports. 
C)  Professional institutional lenders, such as banks and merchant banks, apply their own internal credit risk premiums. 
D)  All of the given answers.

Question 17

An Australian company has issued USD paper into the US debt markets.The company is investigating the possibility of entering into a cross-currency swap.Which of the following generally form the basic mechanics of a cross-currency swap?
i.Re-exchange of principal normally takes place at the same exchange rate as that used at the commencement of the swap.
ii.At the conclusion of the swap,principal amounts are re-exchanged.
iii.Principal amounts,in the currency of debt,are exchanged at the start of the swap.
iv.Interest payment commitments are swapped.
v.Involves the exchange between two parties of debt denominated in one currency,for debt denominated in another currency.

Accepted Answer

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

Question 18

Interest rate swaps and cross-currency swaps:

Accepted Answer

A)  appear on the balance sheets of commercial banks as current assets. 
B)  appear on the balance sheets of commercial banks as current liabilities. 
C)  appear on the balance sheets of commercial banks as long-term liabilities. 
D)  represent a contingent liability for an intermediary. 
A)  appear on the balance sheets of commercial banks as current assets. 
B)  appear on the balance sheets of commercial banks as current liabilities. 
C)  appear on the balance sheets of commercial banks as long-term liabilities. 
D)  represent a contingent liability for an intermediary.

Question 19

An interest rate swap is:

Accepted Answer

A)  another name for a call option. 
B)  another name for a put option. 
C)  an agreement between two or more persons to exchange cash flows over some future period. 
D)  the name for the exchange of a bond futures contract for an option contract. 
A)  another name for a call option. 
B)  another name for a put option. 
C)  an agreement between two or more persons to exchange cash flows over some future period. 
D)  the name for the exchange of a bond futures contract for an option contract.

Question 20

Which of the following regarding the role of a financial intermediary in an interest rate swap is incorrect?

Accepted Answer

A)  Most swaps involve a financial intermediary as counterparty. 
B)  The financial intermediary will most often seek to engage in an offsetting swap. 
C)  The intermediary makes its profit by maintaining a spread between the rates offered to the two counterparties. 
D)  The financial intermediary, by establishing a matched swap, ends up with a positive net exposure in the swap market. 
A)  Most swaps involve a financial intermediary as counterparty. 
B)  The financial intermediary will most often seek to engage in an offsetting swap. 
C)  The intermediary makes its profit by maintaining a spread between the rates offered to the two counterparties. 
D)  The financial intermediary, by establishing a matched swap, ends up with a positive net exposure in the swap market.

A key motive for companies and financial institutions to participate in an interest rate swap is:

In relation to an interest rate swap transaction when the one of the two parties is a financial institution this is called a:

When two parties agree to exchange a set of interest rate cash flows based on a notional principal,this transaction is called:

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a cross call option.

Which of the following statements regarding a cross-currency swap is incorrect?

The risk owing to a timing difference in an interest rate swap transaction,when one party defaults on a payment to another before the other realises it,is called:

In relation to an interest rate swap transaction when the two parties are each entering into a swap to manage a particular interest rate risk exposure,this is called a:

In an interest rate swap,the notional principal:

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

The size of one basis point is:

Which of the following is a way to change the basic structure of a swap?

During a swap,the risk of one party not forwarding its payment while the other party does fulfil its payment obligation is called:

These days,the majority of swaps require a/an _______ to act as an intermediary.

Discuss the structure and cash-flows arrangement for the main type of interest rate swap.

Which of the following may be said to create a debt market environment,whereby one company may obtain a comparative interest rate advantage over another company in the fixed interest rate market,compared with the floating interest rate market?

Interest rate swaps and cross-currency swaps:

An interest rate swap is:

Which of the following regarding the role of a financial intermediary in an interest rate swap is incorrect?

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

A key motive for companies and financial institutions to participate in an interest rate swap is:

In relation to an interest rate swap transaction when the one of the two parties is a financial institution this is called a:

When two parties agree to exchange a set of interest rate cash flows based on a notional principal,this transaction is called:

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a cross call option.

Which of the following statements regarding a cross-currency swap is incorrect?

The risk owing to a timing difference in an interest rate swap transaction,when one party defaults on a payment to another before the other realises it,is called:

In relation to an interest rate swap transaction when the two parties are each entering into a swap to manage a particular interest rate risk exposure,this is called a:

In an interest rate swap,the notional principal:

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

The size of one basis point is:

Which of the following is a way to change the basic structure of a swap?

During a swap,the risk of one party not forwarding its payment while the other party does fulfil its payment obligation is called:

These days,the majority of swaps require a/an _______ to act as an intermediary.

Discuss the structure and cash-flows arrangement for the main type of interest rate swap.

Which of the following may be said to create a debt market environment,whereby one company may obtain a comparative interest rate advantage over another company in the fixed interest rate market,compared with the floating interest rate market?

Interest rate swaps and cross-currency swaps:

An interest rate swap is:

Which of the following regarding the role of a financial intermediary in an interest rate swap is incorrect?

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

Options

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