Exam 21: Swaps and Floating Rate Products

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?

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?

A plain vanilla interest-rate swap is an agreement to exchange a series of periodic payments, one computed at a fixed rate and the other at

Who is likely to bear the greater counterparty risk in a swap where A pays fixed and B pays floating if interest rates are expected to rise over the life of the swap?

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?

The US Treasury market day-count convention is

Your firm can borrow fixed at 8% and floating at Libor+1%. You can also enter into a fixed-for-Libor swap where the fixed rate is 7.5% (and the swap has the same maturity as the borrowing). What is the cheapest way for the firm to obtain fixed rate financing?

In a plain vanilla fixed-for-floating swap,

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?

Choose the most appropriate of the following alternatives: an off-market swap is one where the fixed rate in the swap is

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?

Firm A can borrow at 4% fixed or at Libor flat in the fixed and floating rate markets, respectively. Firm B can borrow at 7% fixed or Libor plus 100 bps in the fixed and floating rate markets, respectively. A wants to borrow floating and B wants to borrow fixed. If A borrows fixed and B borrows floating and they enter into a fixed-for-Libor interest-rate swap in which A pays Libor flat, what is the range of fixed rates for B that enables each firm to improve its financing costs (compared to accessing financing in the market directly)?

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

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

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