3399 QUIZ 7

A fixed-for-fixed currency swap: A. Is equivalent to a portfolio of FRAs . B. Is equivalent to a long position in one bond and a short position in another bond. C. Is worth the same whether or not principals are exchanged. D. Involves no exchange of principals at the beginning of its life.

. B. Is equivalent to a long position in one bond and a short position in another bond.

Which of the following describes the five-year swap rate? A. The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR on a 5-year swap. B. The fixed rate of interest which a swap market maker is prepared to receive in exchange for LIBOR on a 5-year swap . C. The average of A and B. D. The higher of A and B.

. C. The average of A and B.

An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semiannual compounding? A. 5.06% B. 5.03% C. 4.97% D. 4.94%

A. 5.06%

An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate with quarterly compounding? A. 11.83% B. 11.66% C. 11.77% D. 11.92%

A. 11.83%

Which of the following is true for an interest rate swap? A. A swap is usually worth close to zero when it is first negotiated. B. Each forward rate agreement underlying a swap is worth close to zero when the swap is first entered into. C. Comparative advantage is a valid reason for entering into the swap. D. None of the above.

A. A swap is usually worth close to zero when it is first negotiated.

Which of the following is a way of valuing interest rate swaps where LIBOR is exchanged for a fixed rate of interest? A. Assume that floating payments will equal forward LIBOR rates and discount net cash flows at the risk-free rate. B. Assume that floating payments will equal forward OIS rates and discount net cash flows at the risk-free rate. C. Assume that floating payments will equal forward LIBOR rates and discount net cash flows at the swap rate. D. Assume that floating payments will equal forward OIS rates and discount net cash flows at the swap rate.

A. Assume that floating payments will equal forward LIBOR rates and discount net cash flows at the risk-free rate.

Which of the following is usually true? A. OIS rates are less than the corresponding LIBOR rates. B. OIS rates are greater than corresponding LIBOR rates. C. OIS rates are sometimes greater and sometimes less than LIBOR rates. D. OIS rates are equivalent to one-day LIBOR rates.

A. OIS rates are less than the corresponding LIBOR rates.

A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When interest rates increase, which of the following is true? A. The value of the swap to the company increases. B. The value of the swap to the company decreases. C. The value of the swap can either increase or decrease. D. The value of the swap does not change provided the swap rate remains the same.

A. The value of the swap to the company increases.

Which of the following is true for the party paying fixed in an interest rate swap? Assume no other transactions with the counterparty. A. There is more credit risk when the yield curve is upward sloping than when it is downward sloping. B. There is more credit risk when the yield curve is downward sloping than when it is upward sloping. C. The credit exposure increases when interest rates decline. D. There is no credit exposure provided a financial institution is used as the intermediary.

A. There is more credit risk when the yield curve is upward sloping than when it is downward sloping.

The zero curve is upward sloping. Define X as the 1-year par yield, Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 year. Which of the following is true? A. X is less than Y which is less than Z B. Y is less than X which is less than Z C. X is less than Z which is less than Y D. Z is less than Y which is less than X

A. X is less than Y which is less than Z

An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 4%. All rates are annually compounded. What is the value of the swap as a percentage of the principal when OIS and LIBOR rates are the same? A. 0.00 B. 2.66 C. 2.06 D. 1.06

B. 2.66

Which of the following describes the five-year swap rate? A. The rate on a five-year loan to an AA-rated company. B. The rate on a five-year loan to an A-rated company. C. The rate that can be earned over five years from a series of short-term loans to AA-rated companies. D. The rate that can be earned over five years from a series of short-term loans to A-rated companies.

B. 2.66

A company can invest funds for five years at LIBOR minus 30 basis points. The five-year swap rate is 3%. What fixed rate of interest can the company earn by using the swap? A. 2.4% B. 2.7% C. 3.0% D. 3.3

B. 2.7%

A floating-for-fixed currency swap is equivalent to: A. Two interest rate swaps, one in each currency. B. A fixed-for-fixed currency swap and one interest rate swap. C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency. D. None of the above.

B. A fixed-for-fixed currency swap and one interest rate swap.

The compounding frequency for an interest rate defines: A. The frequency with which interest is paid. B. A unit of measurement for the interest rate. C. The relationship between the annual interest rate and the monthly interest rate. D. None of the above

B. A unit of measurement for the interest rate.

The modified duration of a bond portfolio worth $1 million is 5 years. By approximately how much does the value of the portfolio change, if all yields increase by 5 basis points? A. Increase of $2,500 B. Decrease of $2,500 C. Increase of $25,000 D. Decrease of $25,000

B. Decrease of $2,500

Which of the following is true of the fed funds rate? A. It is the same as the Treasury rate. B. It is an overnight interbank rate. C. It is a rate for which collateral is posted. D. It is a type of repo rate.

B. It is an overnight interbank rate.

Which of the following is true? A. Principals are not usually exchanged in a currency swap. B. The principal amounts usually flow in the opposite direction to interest payments at the beginning of a currency swap and in the same direction as interest payments at the end of the swap. C. The principal amounts usually flow in the same direction as interest payments at the beginning of a currency swap and in the opposite direction to interest payments at the end of the swap. D. Principals are not usually specified in a currency swap.

B. The principal amounts usually flow in the opposite direction to interest payments at the beginning of a currency swap and in the same direction as interest payments at the end of the swap.

Bootstrapping involves: A. Calculating the yield on a bond. B. Working from short maturity instruments to longer maturity instruments determining zero rates at each step. C. Working from long maturity instruments to shorter maturity instruments determining zero rates at each step. D. The calculation of par yields.

B. Working from short maturity instruments to longer maturity instruments determining zero rates at each step.

An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding? A. 5.79% B. 6.21% C. 5.83% ' D. 6.18%

C. 5.83%

The six-month zero rate is 8% per annum with semiannual compounding. The price of a oneyear bond that provides a coupon of 6% per annum semiannually is 97. What is the one-year continuously compounded zero rate? A. 8.02% B. 8.52% C. 9.02% D. 9.52%

C. 9.02%

A floating-for-floating currency swap is equivalent to: A. Two interest rate swaps, one in each currency. B. A fixed-for-fixed currency swap and one interest rate swap. C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency. D. None of the above.

C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency.

What is a repo rate? A. An uncollateralized rate. B. A rate where the credit risk is relative high. C. The rate implicit in a transaction where securities are sold and bought back later at a higher price. D. None of the above.

C. The rate implicit in a transaction where securities are sold and bought back later at a higher price.

The yield curve is flat at 6% per annum. What is the value of an FRA where the holder receives interest at the rate of 8% per annum for a six-month period on a principal of $1,000 starting in two years? All rates are compounded semiannually. A. $9.12 B. $9.02 C. $8.88 D. $8.63

D. $8.63

The two-year zero rate is 6% and the three-year zero rate is 6.5%. What is the forward rate for the third year? All rates are continuously compounded. A. 6.75% B. 7.0% C. 7.25% D. 7.5%

D. 7.5%

A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year zerocoupon bond. What is the duration of the portfolio? A. 6 years B. 7 years C. 8 years D. 9 years

D. 9 years

Which of the following describes an interest rate swap? A. A way of converting a liability from fixed to floating. B. A portfolio of forward rate agreements. C. An agreement to exchange interest at a fixed rate for interest at a floating rate. D. All of the above.

D. All of the above.

Which of the following is a use of a currency swap? A. To exchange an investment in one currency for an investment in another currency. B. To exchange borrowing in one currency for borrowings in another currency. C. To take advantage of situations where the tax rates in two countries are different. D. All of the above.

D. All of the above.

Under liquidity preference theory, which of the following is always true? A. The forward rate is higher than the spot rate when both have the same maturity. B. Forward rates are unbiased predictors of expected future spot rates. C. The spot rate for a certain maturity is higher than the par yield for that maturity. D. Forward rates are higher than expected future spot rates.

D. Forward rates are higher than expected future spot rates.

Which of the following is NOT a theory of the term structure? A. Expectations theory B. Market segmentation theory C. Liquidity preference theory D. Maturity preference theory

D. Maturity preference theory

Which of the following is true? A. When interest rates in the economy increase, all bond prices increase. B. As its coupon increases, a bond's price decreases. C. Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same. D. None of the above.

D. None of the above.

The zero curve is downward sloping. Define X as the 1-year par yield, Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 years. Which of the following is true? A. X is less than Y which is less than Z. B. Y is less than X which is less than Z. C. X is less than Z which is less than Y. D. Z is less than Y which is less than X.

D. Z is less than Y which is less than X.