FIN402 Chap 12: swaps

9. For a currency swap with $10 million notional amount, the notional amount in British pounds if the exchange rate is $1.55 is (approximately) a. ₤11.55 million b. ₤15.5 million c. ₤10 million d. ₤6.45 million e. none of the above

d. ₤6.45 million

30. The combination of a pay euro fixed and receive dollar fixed swap with a pay dollar floating and receive euro fixed results in a. a currency swap b. a currency swap, receive euro fixed and pay euro floating c. an interest rate swap, pay dollar fixed and receive dollar floating d. an interest rate swap, receive euro fixed and pay euro floating e. an interest rate swap, pay dollar floating and receive dollar fixed

e. an interest rate swap, pay dollar floating and receive dollar fixed

7. An interest rate swap with both sides paying a floating rate is called a a. plain vanilla swap b. two-way swap c. floating swap d. spread swap e. basis swap

e. basis swap

20. Which of the following is not a way to terminate a swap: a. the two counterparties cash settle the market value b. enter into an opposite swap with another counterparty c. hold the swap to its maturity date d. use a forward contract or option on the swap to enter into an offsetting swap e. borrow the notional amount and pay off the counterparty

e. borrow the notional amount and pay off the counterparty

12. Find the upcoming net payment in a plain vanilla interest rate swap in which the fixed party pays 10 percent and the floating rate for the upcoming payment is 9.5 percent. The notional amount is $20 million and payments are based on the assumption of 180 days in the payment period and 360 days in a year. a. fixed payer pays $1,950,000 b. fixed payer pays $950,000 c. floating payer pays $1 million d. floating payer pays $50,000 e. fixed payer pays $50,000

e. fixed payer pays $50,000

26. The value of a pay-fixed, receive floating interest rate swap is found as the value of a a. floating-rate bond times the value of a fixed-rate bond. b. floating-rate bond plus the value of a fixed-rate bond. c. floating-rate bond minus the value of another floating-rate bond. d. fixed-rate bond minus the value of another fixed-rate bond. e. floating-rate bond minus the value of a fixed-rate bond.

e. floating-rate bond minus the value of a fixed-rate bond.

23. Equity swaps can be used for all of the following except: a. to synthetically buy stock b. to synthetically sell stock c. to convert dividends into capital gains d. to synthetically re-align an equity portfolio e. none of the above

e. none of the above

13. Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting. a. party A pays $2,500,000, and party B pays SF1,400,000 b. party A pays SF1,400,000, and party B pays $2,500,000 c. equity party A pays SF1,750,000, and party B pays SF1,400,000 d. party A pays $2,500,000, and party B pays $2,000,000 e. party A pays $50 million, and party B pays SF35 million

c. equity party A pays SF1,750,000, and party B pays SF1,400,000

11. Which of the following distinguishes equity swaps from currency swaps? a. equity swap payments are always hedged b. equity swap payments are made on the first day of the month c. equity swap payments can be negative d. equity swap payments have more credit risk e. none of the above

c. equity swap payments can be negative

16. Find the fixed rate on a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year) for one year. The prices of Eurodollar zero coupon bonds are 0.9756 (180 days) and 0.9434 (360 days). a. 5.9 percent b. 5 percent c. 6 percent d. 5.5 percent e. 2.95 percent

a. 5.9 percent

28. The value of a pay-fixed, receive-floating interest rate swap is found as the value of a a. floating-rate bond minus the value of a fixed-rate bond. b. fixed-rate bond minus the value of a floating-rate bond. c. floating-rate bond minus the value of another floating-rate bond. d. fixed-rate bond minus the value of another fixed-rate bond. e. none of the above correctly identify how this value is found.

a. floating-rate bond minus the value of a fixed-rate bond.

4. Which of the following is not a type of swap? a. settlement swaps b. commodity swaps c. interest rate swaps d. equity swaps e. currency swaps

a. settlement swaps

1. The difference between the swap rate and the rate on a Treasury security of the same maturity is called the a. swap spread b. risk premium c. swap basis d. settlement spread e. LIBOR

a. swap spread

25. Interest rate swaps can be used for all of the following purposes except: a. to borrow at the prime rate b. to convert a fixed-rate loan into a floating-rate loan c. to convert a floating-rate loan into a fixed-rate loan d. to speculate on interest rates e. to hedge interest rate risk

a. to borrow at the prime rate

5. The underlying amount of money on which the swap payments are made is called a. settlement value b. market value c. notional amount d. base value e. equity value

c. notional amount

10. A currency swap without the exchange of notional amount is most likely to be used in what situation? a. a company issuing a bond b. a company generating cash flows in a foreign currency c. a company arranging a loan d. a dealer trying to hedge a currency option e. none of the above

b. a company generating cash flows in a foreign currency

8. Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be combined with this swap to produce a swap to produce a plain vanilla swap in currency B. a. pay currency B floating, receive currency A fixed b. pay currency B fixed, receive currency A floating c. pay currency B fixed, receive currency A fixed d. pay currency B floating, receive currency A floating e. none of the above

b. pay currency B fixed, receive currency A floating

6. The most basic and common type of swap is called a. basis swap b. plain vanilla swap c. plain paper swap d. commercial swap e. bond swap

b. plain vanilla swap

3. To determine the fixed rate on a swap, you would a. use put-call parity b. price it as the issuance of a fixed rate bond and purchase of a floating rate bond or vice versa c. use the same fixed rate as that of a zero coupon bond of equivalent maturity d. use the continuously compounded rate for the shortest maturity bond e. none of the above

b. price it as the issuance of a fixed rate bond and purchase of a floating rate bond or vice versa

29. Swap payments typically involve adjusting for the fraction of the year in some fashion. This adjustment is known as a. the compounding convention b. the accrual period c. the fraction convention d. the money market convention e. the payment period

b. the accrual period

18. Find the market value of a plain vanilla swap from the perspective of the fixed rate payer in which the upcoming payment is in 30 days, and there is one more payment 180 days after that. The fixed rate is 7 percent and the upcoming floating payment is at 6.5 percent. The notional amount is $15 million. Assume 360 days in a year. The prices of Eurodollar zero coupon bonds are 0.9934 (30 days) and 0.9528 (210 days). a. the fixed payer pays $31,763.75 b. the fixed payer pays $71,527.50 c. the floating payer pays $49,500 d. the floating payer pays $194,228 e. none of the above

b. the fixed payer pays $71,527.50

2. Interest rate swap payments are made a. on the last day of the quarter b. on the first day of each month c. at whatever dates are agreed upon by the counterparties d. on the 15th of the agreed-upon months e. on the last day of the month

c. at whatever dates are agreed upon by the counterparties

19. Which of the following statements about constant maturity swaps is not true? a. the CMT rate is linked to a U. S. treasury security of equivalent maturity b. the typical maturity is 2 to 5 years c. the maturity is constant d. one rate is based on a security of a longer rate than the settlement period e. the swap is a type of interest rate swap

c. the maturity is constant