Deck 9: Swaps and Interest Rate Derivatives

Question 1

What is the name of the debt instruments with a high coupon in earlier payment periods and a lower coupon in later payment periods?

A)step-down coupon notes
B)callable step-up notes
C)inverse floaters
D)structured notes

Answer 1

A

Question 2

If the world capital market were fully integrated,the incentive to swap would be ____ because ____ arbitrage opportunities would exist.

A)increased;more
B)reduced;fewer
C)increased;fewer
D)reduced;more

Answer 2

B

Question 3

________ is a cash-settled,over-the-counter forward contract that allows a company to fix an interest rate to be applied to a specified future interest period on a notional principal amount.

A)interest rate currency swap
B)dual currency bond
C)exchange of principal
D)forward rate agreement

Answer 3

D

Question 4

An)__________ is a contract that fixes an interest rate today on a future loan or deposit

A)inverse floater
B)step-up
C)step-down
D)forward forward

Question 5

the swap market,the reference amount against which the interest is calculated is known as the

A)notional principal
B)basis amount
C)arbitrage principal
D)swap differential

Question 6

The following statement is to be used in answering questions 20 and 21.
Company X,a low?rated firm,desires a fixed?rate,long?term loan.X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR.Its direct borrowing cost is 11% in the fixed?rate bond market.In contrast,company Y,which prefers a floating?rate loan,has access to fixed?rate funds in the Eurodollar bond market at 9% and floating?rate funds at LIBOR + 1/4%.Suppose they split the cost savings.
How much would X pay for its fixed?rate funds?

A)9.5%
B)10.0%
C)10.5%
D)10.75%

Question 7

Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ______ from functioning fully.

A)hedging
B)factoring
C)arbitrage
D)forfaiting

Question 8

A currency swap is most similar in economic purpose to a
A.basis swap
B.parent company loan
C.debt?equity swap
D.parallel loan

Question 9

a currency swap,the effective interest rate on the money raised is known as the

A)notional principal
B)all-in cost
C)right of offset
D)yield to call

Question 10

theoretical principal underlying the swap is termed the

A)basis amount
B)swap differential
C)notional principal
D)arbitrage principal

Question 11

In the swap market,the reference amount against which the interest is calculated is known as the

A)notional principal
B)basis amount
C)arbitrage principal
D)swap differential

Question 12

Currency swaps are often used to provide long?term financing in foreign currencies but NOT because

A)long?term capital markets are not well developed
B)long?term forward foreign exchange markets are absent
C)of high foreign taxes
D)long-term capital markets are easily accessible

Question 13

A currency swap is equivalent to a

A)currency option,with the exercise price equal to the current spot rate
B)long?dated forward foreign exchange contract,where the forward rate is the current spot rate.
C)interest rate swap,where the basis is the differential between the fixed and floating interest rates
D)short?term currency futures contract

Question 14

a __________ swaps,two parties exchange floating interest payments based on different reference rates.

A)basis
B)coupon
C)notional
D)forward rate

Question 15

Swaps are primarily of value because they permit firms to

A)tap new capital markets
B)reduce risks
C)reduce taxes
D)a and b only

Question 16

The following statement is to be used in answering questions 20 and 21.
Company X,a low?rated firm,desires a fixed?rate,long?term loan.X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR.Its direct borrowing cost is 11% in the fixed?rate bond market.In contrast,company Y,which prefers a floating?rate loan,has access to fixed?rate funds in the Eurodollar bond market at 9% and floating?rate funds at LIBOR + 1/4%.Suppose they split the cost savings.
How much would Y pay for its floating?rate funds?

A)LIBOR ?.25%
B)LIBOR ?.50%
C)LIBOR
D)LIBOR + .5%

Question 17

exchange of debt-service obligations denominated in one currency for the service on an agreed-upon principal amount of debt denominated in another currency is known as

A)a currency swap
B)an interest rate swap
C)a floating-rate bond
D)a fixed-rate bond

Question 18

The average interest rate offered by a specific group of multinational banks in London is known as the

A)LIBOR rate
B)prime rate
C)fed funds rate
D)Eurobond rate

Question 19

A _________ future is a cash-settled futures contract for a three-month $1,000,000 eurodollar deposit that pays LIBOR.

A)forward
B)eurodollar
C)forward rate agreement
D)currency swap

Question 20

__________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount.

A)interest rate
B)currency
C)bond
D)currency bond

Question 21

The following statement is to be used in answering questions 22-24.
Axil Corp.has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating?rate dollar borrower,which it can be at LIBOR + 1%.Bevel Corp.strongly prefers fixed?rate DM debt,but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry.Bevel,however,can obtain Eurodollars at LIBOR + ½%.
What is the maximum possible cost savings to Bevel from engaging in a currency swap with Axil?

A)1%
B)75%
C)2%
D)1.25%

Question 22

The following statement is to be used in answering questions 22-24.
Axil Corp.has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating?rate dollar borrower,which it can be at LIBOR + 1%.Bevel Corp.strongly prefers fixed?rate DM debt,but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry.Bevel,however,can obtain Eurodollars at LIBOR + ½%.
What is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?

A)1%
B)75%
C)2%
D)1.25%

Question 23

The economic benefits associated with swaps may derive from all of the following EXCEPT

A)legal restrictions on spot and forward foreign exchange transactions
B)different perceptions by investors of risk and creditworthiness of the two parties to the swap
C)appeal or acceptability of one borrower to a certain class of investor
D)in nations with fixed or pegged exchange rates

Question 24

Suppose a bank charges .8% to arrange the swap and Axil and Bevel split the resulting cost savings.Then Axil will pay ??? for its floating?rate money and Bevel will pay ???? for its fixed?rate money.

A)LIBOR ? .7%;7.5%
B)LIBOR + .4%;7.15%
C)LIBOR;7.45%
D)LIBOR + .5%;6.75%

Question 25

Suppose a U.S.corporation wants to secure fixed?rate funds in pounds in order to reduce its pound exposure,but is hampered in doing so because it is a relatively unknown credit in the British financial market.In contrast,a British company that is well established in its own country may desire floating?rate dollar financing,but is relatively unknown in the U.S.financial market.What is the most appropriate form of swap for these two parties?

A)interest rate/currency swap
B)currency swap
C)interest rate swap
D)debt/equity swap