Question 1

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to

Accepted Answer

A) do nothing. 
B) pay floating and receive fixed. 
C) receive floating and pay fixed. 
D) none of the above. 
A) do nothing. 
B) pay floating and receive fixed. 
C) receive floating and pay fixed. 
D) none of the above. A

Question 2

The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the ________.

Accepted Answer

A) Federal Reserve Discount rate 
B) federal funds rate 
C) LIBOR 
D) one-year U.S. Treasury Bill 
A) Federal Reserve Discount rate 
B) federal funds rate 
C) LIBOR 
D) one-year U.S. Treasury Bill C

Question 3

A firm enters into an agreement to ________ British pounds and ________ U.S. dollars. If the dollar appreciates vs. the pound the firm will realize an accounting profit on the swap transaction.

Accepted Answer

A) pay; receive 
B) receive; pay 
C) pay; pay 
D) receive; receive 
A) pay; receive 
B) receive; pay 
C) pay; pay 
D) receive; receive A

Question 4

TABLE 9.1
Use the information for Polaris Corporation to answer following question(s).
Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00%  
-Refer to Table 9.1. Polaris could have locked in the future interest rate payments by using

Accepted Answer

A) a forward rate agreement. 
B) an interest rate future. 
C) an interest rate swap. 
D) any of the above 
A) a forward rate agreement. 
B) an interest rate future. 
C) an interest rate swap. 
D) any of the above

Question 5

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

Accepted Answer

With exchange-traded derivatives, the ex

Question 6

The Federal Funds rate is the most common reference rate for international interest rate calculations.

Accepted Answer

A) True 
 B)False

Question 7

TABLE 9.1
Use the information for Polaris Corporation to answer following question(s).
Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00%  
-Refer to Table 9.1. If the LIBOR rate jumps to 5.00% after the first year what will be the all-in-cost (i.e. the internal rate of return)for Polaris for the entire loan?

Accepted Answer

A) 5.25% 
B) 5.50% 
C) 6.09% 
D) 6.58% 
A) 5.25% 
B) 5.50% 
C) 6.09% 
D) 6.58%

Question 8

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could

Accepted Answer

A) sell an interest rate futures contract of a similar maturity to the loan. 
B) buy an interest rate futures contract of a similar maturity to the loan. 
C) swap the adjustable rate loan for another of a different maturity. 
D) none of the above 
A) sell an interest rate futures contract of a similar maturity to the loan. 
B) buy an interest rate futures contract of a similar maturity to the loan. 
C) swap the adjustable rate loan for another of a different maturity. 
D) none of the above

Question 9

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

Accepted Answer

A) True 
 B)False

Question 10

Swap agreements replace existing loan agreements.

Accepted Answer

A) True 
 B)False

Question 11

Instruction 9.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
-Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
-Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
-Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 9.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is (Assume your firm is borrowing money.)

Accepted Answer

A) that interest rates might go down or that your credit rating might improve. 
B) that interest rates might go up or that your credit rating might improve. 
C) that interest rates might go up or that your credit rating might get worse. 
D) none of the above 
A) that interest rates might go down or that your credit rating might improve. 
B) that interest rates might go up or that your credit rating might improve. 
C) that interest rates might go up or that your credit rating might get worse. 
D) none of the above

Question 12

Which of the following would be considered an example of a currency swap?

Accepted Answer

A) Exchanging a dollar interest obligation for a British pound obligation. 
B) Exchanging a eurodollar interest obligation for a dollar obligation. 
C) Exchanging a eurodollar interest obligation for a British pound obligation. 
D) All of the above are examples of a currency swap. 
A) Exchanging a dollar interest obligation for a British pound obligation. 
B) Exchanging a eurodollar interest obligation for a dollar obligation. 
C) Exchanging a eurodollar interest obligation for a British pound obligation. 
D) All of the above are examples of a currency swap.

Question 13

Instruction 9.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
-Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
-Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
-Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 9.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is (Assume your firm is borrowing money.)

Accepted Answer

A) that interest rates might go down or that your credit rating might improve. 
B) that interest rates might go up or that your credit rating might improve. 
C) that interest rates might go up or that your credit rating might get worse. 
D) none of the above 
A) that interest rates might go down or that your credit rating might improve. 
B) that interest rates might go up or that your credit rating might improve. 
C) that interest rates might go up or that your credit rating might get worse. 
D) none of the above

Question 14

Instruction 9.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
-Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
-Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
-Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 9.1. If your firm felt very confident that interest rates would fall or, at worst, remain at current levels, and were very confident about the firm's credit rating for the next 10 years, which strategy would you likely choose? (Assume your firm is borrowing money.)

Accepted Answer

A) Strategy #3 
B) Strategy #2 
C) Strategy #1 
D) Strategy #1, #2, or #3, you are indifferent among the choices. 
A) Strategy #3 
B) Strategy #2 
C) Strategy #1 
D) Strategy #1, #2, or #3, you are indifferent among the choices.

Question 15

A swap agreement may involve currencies or interest rates, but never both.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is an unlikely reason for firms to participate in the swap market?

Accepted Answer

A) To replace cash flows scheduled in an undesired currency with cash flows in a desired currency. 
B) Firms may raise capital in one currency but desire to repay it in another currency. 
C) Firms desire to swap fixed and variable payment or receipt of funds. 
D) All of the above are likely reasons for a firm to enter the swap market. 
A) To replace cash flows scheduled in an undesired currency with cash flows in a desired currency. 
B) Firms may raise capital in one currency but desire to repay it in another currency. 
C) Firms desire to swap fixed and variable payment or receipt of funds. 
D) All of the above are likely reasons for a firm to enter the swap market.

Question 17

Instruction 9.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
-Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
-Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
-Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 9.1. Choosing strategy #2 will

Accepted Answer

A) guarantee the lowest average annual rate over the next three years. 
B) eliminate credit risk but retain repricing risk. 
C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D) preclude the possibility of sharing in lower interest rates over the three-year period. 
A) guarantee the lowest average annual rate over the next three years. 
B) eliminate credit risk but retain repricing risk. 
C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D) preclude the possibility of sharing in lower interest rates over the three-year period.

Question 18

________ is the possibility that the borrower's credit worthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

Accepted Answer

A) Credit risk; Interest rate risk 
B) Repricing risk; Credit risk 
C) Interest rate risk; Credit risk 
D) Credit risk; Repricing risk 
A) Credit risk; Interest rate risk 
B) Repricing risk; Credit risk 
C) Interest rate risk; Credit risk 
D) Credit risk; Repricing risk

Question 19

TABLE 9.1
Use the information for Polaris Corporation to answer following question(s).
Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00%  
-Refer to Table 9.1. If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e. the internal rate of return)for Polaris for the entire loan?

Accepted Answer

A) 4.00% 
B) 4.50% 
C) 5.25% 
D) 5.60% 
A) 4.00% 
B) 4.50% 
C) 5.25% 
D) 5.60%

Question 20

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to

Accepted Answer

A) pay fixed-rate interest and receive floating rate interest. 
B) pay floating rate and receive fixed rate. 
C) pay fixed rate and receive fixed rate. 
D) pay floating rate and receive floating rate. 
A) pay fixed-rate interest and receive floating rate interest. 
B) pay floating rate and receive fixed rate. 
C) pay fixed rate and receive fixed rate. 
D) pay floating rate and receive floating rate.

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to

The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the ________.

A firm enters into an agreement to British pounds and U.S. dollars. If the dollar appreciates vs. the pound the firm will realize an accounting profit on the swap transaction.

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

The Federal Funds rate is the most common reference rate for international interest rate calculations.

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

Swap agreements replace existing loan agreements.

Which of the following would be considered an example of a currency swap?

A swap agreement may involve currencies or interest rates, but never both.

Which of the following is an unlikely reason for firms to participate in the swap market?

is the possibility that the borrower's credit worthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

Current Multinational Financial Challenges: the Credit Crisis of 2007-2009

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Operating Exposure

Translation Exposure

The Global Cost and Availability of Capital

Sourcing Equity Globally

Sourcing Debt Globally

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Political Risk

Multinational Capital Budgeting

Multinational Tax Management

Working Capital Management

International Trade Finance

Filters

Exam 9: Interest Rate and Currency Swaps

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to

The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the ________.

A firm enters into an agreement to ________ British pounds and ________ U.S. dollars. If the dollar appreciates vs. the pound the firm will realize an accounting profit on the swap transaction.

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

The Federal Funds rate is the most common reference rate for international interest rate calculations.

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

Swap agreements replace existing loan agreements.

Which of the following would be considered an example of a currency swap?

A swap agreement may involve currencies or interest rates, but never both.

Which of the following is an unlikely reason for firms to participate in the swap market?

________ is the possibility that the borrower's credit worthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

Current Multinational Financial Challenges: the Credit Crisis of 2007-2009

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Operating Exposure

Translation Exposure

The Global Cost and Availability of Capital

Sourcing Equity Globally

Sourcing Debt Globally

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Political Risk

Multinational Capital Budgeting

Multinational Tax Management

Working Capital Management

International Trade Finance

Filters

A firm enters into an agreement to British pounds and U.S. dollars. If the dollar appreciates vs. the pound the firm will realize an accounting profit on the swap transaction.

is the possibility that the borrower's credit worthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.