FIN 4110 - Chapter 9
9.1 An __________ 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
a
9.10 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
a
9.11 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
a
9.14 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
a
9.7 In 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
b
9.3 The theoretical principal underlying the swap is termed the a) basis amount b) swap differential c) notional principal d) arbitrage principal
c
9.2 In a __________ swaps, two parties exchange floating interest payments based on different reference rates. a) basis b) coupon c) notional d) forward rate
a
9.26 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
a
9.4 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
a
9.6 The 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
a
9.13 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
b
9.16 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
b
9.19 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
b
9.5 In a _____ swap, one party pays a fixed rate calculated at the time off trade as a spread to a particular Treasury bond, and the other sides pays a floating rate. a) currency b) interest rate c) coupon d) basis
b
9.18 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
c
9.8 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
c
9.12 A(n) __________ 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
d
9.15 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
d
9.17 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
d
9.25 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
d
9.9 A(n) ________ 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
d