FIN 652 - Quiz 7

The best way to characterize a swap is which of the following? An agreement where one party exchanges some commodity in the present in order to receive another type of commodity from the other party at a future date. An agreement where two parties exchange cash flows at some specified future date. An agreement between two parties where only one party accepts an obligation to deliver an underlying asset to the other at some agreed upon time in the future. An agreement between two parties where one party exchanges a series of periodic cash flows for a one-time cash flow at maturity from the other party.

An agreement where two parties exchange cash flows at some specified future date.

A company can borrow at 10% in fixed-rate markets or at LIBOR+1.75% in floating rate markets. Company B can borrow at 9% in fixed-rate markets or at LIBOR+1.5% in floating rate markets. Which of the following statements is true? Company B has a comparative advantage in fixed rate markets. Company B has a comparative advantage in floating rate markets. None of above. Company A has a comparative advantage in fixed rate markets.

Company B has a comparative advantage in fixed rate markets.

A bank enters into a 3-year swap with company X where it pays LIBOR and receives 3.00%. It enters into an offsetting swap with company Y where is receives LIBOR and pays 2.95%. Which of the following is true: If company X defaults, the swap with company Y continues If company Y defaults, the swap with company X is null and void If company X defaults, the swap with company Y is null and void The bank's bid-offer spread is 0.5 basis points

If company X defaults, the swap with company Y continues

ow would a financial intermediary profit from facilitating a swap transaction. It would retain the assets of a defaulting party. It charges a commission as a percentage of the total swapped amount. It might receive a small "spread" from the offsetting transactions..

It might receive a small "spread" from the offsetting transactions..

Company A has an investment that pays a fixed rate of 5% on a principle of $100 million. It enters a swap agreement with a bank where it pays a fixed rate of 5.015% and receives LIBOR. Which of the followings best describes the effective interest earned after the swap is created. 4.985% 5.015% LIBOR-0.015% LIBOR

LIBOR-0.015%

Which of the following is true? Principals are not usually specified in a currency swap 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. 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. Principals are not usually exchanged in a currency swap

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. The correct answer is B. There are two principals in a currency swap, one for each currency. They flow in the opposite direction to the corresponding interest payments at the beginning of the life of the swap and in the same direction as the corresponding interest payments at the end of the life of the swap.

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? The value of the swap can either increase or decrease The value of the swap to the company increases The value of the swap to the company decreases The value of the swap does not change providing the swap rate remains the same

The value of the swap to the company increases It is receiving the floating rate. When interest rates increase the floating rate can be expected to be higher and so the swap becomes more valuable. The answer is therefore A.

An interest rate swap has _______ worth when first initiated. Over time, its value becomes _______. zero; zero zero; positive or negative positive or negative; positive or negative positive or negative; zero

zero; positive or negative

A company that is party to a swap will be subject to credit risk when the swap has _______ worth. positive zero positive or negative negative

positive

In a currency swap, _______ . the principal is exchanged at both the beginning and end of the swap the principal is not exchanged but the interest payments are the payments are not exchanged but the principal is the principal is not exchanged

the principal is exchanged at both the beginning and end of the swap