Question 1

Suppose Libor caps and floors at the same strike rate are unequal in price. Suppose that, ceteris paribus, there is a sudden increase in interest-rate volatility. Which of the following statements is valid?

Accepted Answer

A)   Caps and floors will increase in value, but caps will increase by more than floors.
B)   Caps and floors will increase by the same amount.
C)   Caps and floors will increase in value, but caps will increase by less than floors.
D)   There is insufficient information to determine the answer. B

Question 2

You have sold a $10,000 notional cap consisting of a single caplet with a strike of 6% for a six-month underlying period. All interest rates are computed based on the 30/360 convention. At maturity of the cap period, the underlying interest rate is 7%. What is the net cash flow to you on maturity?

Accepted Answer

A)    −$50.00- \$ 50.00−$50.00 
B)    +$48.31+ \$ 48.31+$48.31 
C)    −$48.31- \$ 48.31−$48.31 
D)    +$46.73+ \$ 46.73+$46.73   C

Question 3

An amortizing interest-rate swap is one in which

Accepted Answer

A)   The fixed interest rate in the swap declines in a specified manner over the life of the swap.
B)   The floating interest rate in the swap declines in a specified manner over the life of the swap.
C)   The notional principal amount in the swap declines in a specified manner over the life of the swap.
D)   The time-period between payments in the swap gets shorter in a specified manner. C

Question 4

You enter into a $100 million notional swap to pay six-month Libor and receive 8%. 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 net payment you will receive on September 25 is zero, what must have been the Libor reset on march 25?

Accepted Answer

A)   6%.
B)   Higher than 6%.
C)   Lower than 6%.
D)   Cannot be calculated from the given information.

Question 5

You enter into a $100 million notional swap to pay six-month Libor and receive 6%. 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 is the net amount you will receive on September 25?

Accepted Answer

A)   0.
B)   -$66,667.
C)   +$66,667
D)   +133,333

Question 6

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

Accepted Answer

A)   The short-form method is a computational short cut that is correct on average but may yield higher or lower prices than the forward method.
B)   The short-form method always works well whereas the forward method works well if interest rates are deterministic but not if they are stochastic.
C)   The short-form method requires knowledge of the term-structure of interest rates only out to the next coupon payment whereas the forward method requires knowledge of the entire interest-rate curve out to the maturity of the bond.
D)   The short-form method results in too high a price (relative to the forward method)  if the term-structure of interest rates is downward sloping, and too low a price if it is downward sloping.

Question 7

Consider the following table of prices of five-year semi-annual pay caps and floors: $$\begin{array} { | c | c | c | } 
\hline \text { Strike (\%/) } & \text { Cap price } & \text { Floor price } \
\hline 4 \% & 2.50 & 0.50 \
\hline 5 \% & 1.50 & 1.50 \
\hline 6 \% / & 0.50 & 2.50 \
\hline
\end{array}$$ Assume that the caps and floors also include the first payment in 6 months, so there are 10 payment dates in each instrument. The quoted prices of the caps and floors includes this first payment for which the floating leg has already been set. What is the fixed-rate on a five-year fairly priced swap?

Accepted Answer

A)   4%
B)   5%
C)   6%
D)   Not possible to determine from the available information.

Question 8

The US and euro-zone day-count convention for a floating-rate note (based on Libor and Euribor, respectively) is

Accepted Answer

A)   Actual/365.
B)   Actual/360.
C)   Actual/Actual.
D)   30/360.

Question 9

The UK money-market day-count convention is

Accepted Answer

A)   Actual/365.
B)   Actual/360.
C)   Actual/Actual.
D)   30/360.

Question 10

You have the view that rates will be rising over time. What is thebest kind of swap to exploit this view from among the following alternatives?

Accepted Answer

A)   Pay fixed, receive floating.
B)   Pay floating, receive fixed.
C)   A maturity-mismatch basis swap in which you pay floating indexed to three-month Libor and receive fixed indexed to six-month Libor.
D)   Pay fixed, receive floating on a reverse-amortization swap.

Question 11

Which of the following isnot true of a swaption, i.e., an option on a swap?

Accepted Answer

A)   A swaption is always less valuable than the underlying swap.
B)   A swaption's value is always non-negative.
C)   A payer swaption is worth less than a cap with caplets on the same dates as the swap underlying the swaption.
D)   A swaption's value increases with interest rate volatility irrespective of which side of the underlying swap one may be on.

Question 12

Consider a one-year maturity caplet on underlying six-month Libor at a strike rate of 6%. If the forward rate is lognormal with volatility $\sigma = 0.10$ , and the one-year spot rate is 5%, what is the price of a $100,000-notional caplet if the (1,1.5)-year forward rate is 6%?

Accepted Answer

A)   $113.80
B)   $139.34
C)   $160.96
D)   $227.59

Question 13

Consider a one-year caplet on underlying six-month Libor at a strike rate of 6%. If the corresponding floorlet is equal to the caplet in price, what is the current forward rate for the period (1,1.5) years?

Accepted Answer

A) <6%< 6 \%<6% B) =6%= 6 \%=6% C) 6 \%">>6%> 6 \%>6% D) Cannot be determined from the given information.

Question 14

The US swap market convention, that is used to compute the fixed payments in a USD swap, is

Accepted Answer

A)   Actual/365.
B)   Actual/360.
C)   Actual/Actual.
D)   30/360.

Question 15

The 4%-strike six-month Libor-based two-year cap and floor are trading at $2.30 and $2.55, respectively. Assume that the cap has 4 caplets maturing in 6 months, 1 year, 18 months, and 24 months, respectively, and that the floor similarly has 4 floorlets. What is the NPV at inception of a two-year swap in which you are paying Libor versus receiving 4%?

Accepted Answer

A)    −$0.25- \$ 0.25−$0.25 
B)   $0
C)   $0.25
D)   There is not enough information to determine the price of the swap.

Question 16

A bank makes long-term fixed-rate loans, and funds itself with short-term deposits. It can best manage its vulnerability to interest rate changes by

Accepted Answer

A)   Entering into a basis (floating-floating)  swap.
B)   Entering into a pay-floating/receive-fixed interest rate swap.
C)   Entering into a pay-fixed/receive-floating interest rate swap.
D)   Entering into a fixed-fixed swap where the two legs have different payment frequencies.

Question 17

Which of the following is not an interest-rate swap?

Accepted Answer

A)   A fixed-for-floating swap involving exchange of fixed interest rate payments in one currency for floating payments in the same currency but in which the swap NPV at inception is non-zero.
B)   A floating-for-floating swap in which one floating rate in a currency is exchanged for another floating rate in the same currency.
C)   A fixed-for-floating swap in which a fixed interest rate payment in one currency is exchanged for floating interest-rate payments in another currency.
D)   A fixed-for-floating swap involving exchange of fixed interest rate payments in one currency for floating payments in the same currency but in which the payments are computed on principal that is reduced in a pre-specified manner during the life of the swap.

Question 18

You enter into a $100 million notional swap to pay six-month Libor and receive 8%. 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 is the net amount you will receive on September 25?

Accepted Answer

A)   $933,333
B)   $966,667
C)   $1,000,000
D)   $1,066,667

Question 19

An equivalent description of the holding of a receive-floating pay-fixed swap is as follows:

Accepted Answer

A)   An exchange of a long position in a fixed-rate bond for a short position in a floating-rate note.
B)   A portfolio of long positions in forward-rate agreements (FRAs)  for each swap payment date, all at the same fixed rate as the swap.
C)   A bond that pays the fixed rate minus the floating rate each period.
D)   All of the above.

Question 20

If the (1,1.5)-year forward rate is lognormal with volatility $\sigma = 0.15$ , and the one-year spot rate is 4%, what is the NPV of a $100,000-notional $12 \times 18$ -FRA at a 5% strike rate if the (1,1.5)-year forward rate is 6%, as seen from the buyer's point of view? (Assume the Black model applies for interest-rate options.)

Accepted Answer

A)    −$470.88- \$ 470.88−$470.88 
B)   $0
C)   $475.61
D)   $480.39

Exam 21: Swaps and Floating Rate Products

Suppose Libor caps and floors at the same strike rate are unequal in price. Suppose that, ceteris paribus, there is a sudden increase in interest-rate volatility. Which of the following statements is valid?

You have sold a $10,000 notional cap consisting of a single caplet with a strike of 6% for a six-month underlying period. All interest rates are computed based on the 30/360 convention. At maturity of the cap period, the underlying interest rate is 7%. What is the net cash flow to you on maturity?

An amortizing interest-rate swap is one in which

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

The US and euro-zone day-count convention for a floating-rate note (based on Libor and Euribor, respectively) is

The UK money-market day-count convention is

You have the view that rates will be rising over time. What is thebest kind of swap to exploit this view from among the following alternatives?

Which of the following isnot true of a swaption, i.e., an option on a swap?

Consider a one-year maturity caplet on underlying six-month Libor at a strike rate of 6%. If the forward rate is lognormal with volatility $\sigma = 0.10$ , and the one-year spot rate is 5%, what is the price of a $100,000-notional caplet if the (1,1.5) -year forward rate is 6%?

Consider a one-year caplet on underlying six-month Libor at a strike rate of 6%. If the corresponding floorlet is equal to the caplet in price, what is the current forward rate for the period (1,1.5) years?

The US swap market convention, that is used to compute the fixed payments in a USD swap, is

A bank makes long-term fixed-rate loans, and funds itself with short-term deposits. It can best manage its vulnerability to interest rate changes by

Which of the following is not an interest-rate swap?

An equivalent description of the holding of a receive-floating pay-fixed swap is as follows:

Exam 21: Swaps and Floating Rate Products

Suppose Libor caps and floors at the same strike rate are unequal in price. Suppose that, ceteris paribus, there is a sudden increase in interest-rate volatility. Which of the following statements is valid?

You have sold a $10,000 notional cap consisting of a single caplet with a strike of 6% for a six-month underlying period. All interest rates are computed based on the 30/360 convention. At maturity of the cap period, the underlying interest rate is 7%. What is the net cash flow to you on maturity?

An amortizing interest-rate swap is one in which

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

The US and euro-zone day-count convention for a floating-rate note (based on Libor and Euribor, respectively) is

The UK money-market day-count convention is

You have the view that rates will be rising over time. What is thebest kind of swap to exploit this view from among the following alternatives?

Which of the following isnot true of a swaption, i.e., an option on a swap?

Consider a one-year maturity caplet on underlying six-month Libor at a strike rate of 6%. If the forward rate is lognormal with volatility σ=0.10\sigma = 0.10σ=0.10 , and the one-year spot rate is 5%, what is the price of a $100,000-notional caplet if the (1,1.5) -year forward rate is 6%?

Consider a one-year caplet on underlying six-month Libor at a strike rate of 6%. If the corresponding floorlet is equal to the caplet in price, what is the current forward rate for the period (1,1.5) years?

The US swap market convention, that is used to compute the fixed payments in a USD swap, is

A bank makes long-term fixed-rate loans, and funds itself with short-term deposits. It can best manage its vulnerability to interest rate changes by

Which of the following is not an interest-rate swap?

An equivalent description of the holding of a receive-floating pay-fixed swap is as follows:

Consider a one-year maturity caplet on underlying six-month Libor at a strike rate of 6%. If the forward rate is lognormal with volatility $\sigma = 0.10$ , and the one-year spot rate is 5%, what is the price of a $100,000-notional caplet if the (1,1.5) -year forward rate is 6%?