Question 1) A company can invest funds for five years at LIBOR minus 30 ba

1) 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%

2) 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

3) 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

4) 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

5) 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 situations where the tax rates in two countries are different

D) All of the above

6) Which of the following is 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

7) Which of the following describes an interest rate swap?

A) The exchange of a fixed rate bond for a floating rate bond

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

8) 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

9) Which of the following is true for the party paying fixed in an interest rate swap?

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 providing a financial institution is used as the intermediary

10) Since the 2008 credit crisis

A) LIBOR has replaced OIS as the discount rate for non-collateralized swaps

B) OIS has replaced LIBOR as the discount rate for non-collateralized swaps

C) LIBOR has replaced OIS as the discount rate for collateralized swaps

D) OIS has replaced LIBOR as the discount rate for collateralized swaps

11) When LIBOR is used as the discount rate

A) The value of a swap is worth zero immediately after a coupon payment

B) The value of a swap is worth zero immediately before a coupon payment

C) The value of the floating rate bond underlying a swap is worth par immediately after a coupon payment

D) The value of the floating rate bond underlying a swap is worth par immediately before a coupon payment

12) 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 providing the swap rate remains the same

13) 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

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