Intl. Fin. Ch. 8 MC

4) If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going up, the position outcome would be:

A) Futures price falls; short earns a profit.

3) An agreement to swap the currencies of a debt service obligation would be termed a/an:

A) currency swap.

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

A) do nothing.

1) An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

A) forward rate agreement.

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

A) pay fixed-rate interest and receive floating rate interest.

3) 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:

A) sell an interest rate futures contract of a similar maturity to the loan.

5) If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:

B) Futures price rises; short earns a loss.

1) The single largest interest rate risk of a firm is:

B) debt service.

2) A/an ________ is a contract to lock in today interest rates over a given period of time.

B) interest rate future

5) A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to:

B) pay floating rate and receive fixed rate.

6) If a financial manager earning interest on a future date were to buy Futures and interest rates end up going up, the position outcome would be:

C) Future price falls; long earns a loss.

1) The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:

C) counterparty risk.

1) An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

C) interest rate swap.

2) An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an:

C) interest rate swap.

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

D) All of the above are examples of a currency swap.

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

D) All of the above are likely reasons for a firm to enter the swap market.

1) ________ is the possibility that the borrower's creditworthiness 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.

D) Credit risk; Repricing risk

7) If a financial manager earning interest on a future date were to buy Futures and interest rates end up going down, the position outcome would be:

D) Futures price rises; long earns a profit.

2) Individual borrowers — whether they be governments or companies — possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT:

D) risk-free rate

12) Unlike the situation with exchange rate risk, there is no uncertainty on the part of management for shareholder preferences regarding interest rate risk. Shareholders prefer that managers hedge interest rate risk rather than having shareholders diversify away such risk through portfolio diversification.

FALSE

13) Interest rate calculations differ by the number of days used in the period's calculation and in the definition of how many days there are in a year (for financial purposes). One of the practices is to use 260 business days in a year.

FALSE

5) The London Interbank Offered Rate (LIBOR) is published under the auspices of the British Bankers Association. A panel of 16 major multinational banks self-report their actual borrowing rate.

FALSE

7) Sovereign credit risk is the global financial market's assessment of the ability of a sovereign borrower to repay USD denominated debt.

FALSE

8) Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.

FALSE

10) One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity, currency of composition, and fixed/floating pricing.

TRUE

11) One of the reasons companies use interest rate swaps is because they are interested in opportunities to lower the cost of their debt.

TRUE

3) Historically, interest rate movements have shown less variability and greater stability than exchange rate movements.

TRUE

4) Some of the world's largest and most financially sound firms may borrow at variable rates less than LIBOR.

TRUE

6) The basis point spreads between credit ratings dramatically rise for borrowers of credit qualities less than BBB.

TRUE

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

false

4) A firm entering into a currency or interest rate swap agreement holds no responsibility for the timely servicing of its own debt obligations since that responsibility now is born by the second party to the contract.

false

9) A basis point is one-tenth of one percent.

false

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

false

3) Swap rates are derived from the yield curves in each major currency.

true

5) The real exposure of an interest or currency swap is not the total notional principal, but the mark-to-market values of differentials in interest or currency interest payments since the inception of the swap agreement.

true