Question 1

According to the text, any political aspects that prevent a counterparty on a swap from meeting its payment obligations represent

Accepted Answer

A)  sovereign risk.
B)  basis risk.
C)  credit risk.
D)  none of the aboveE) A) and D)
F) B) and C)

Question 2

Savings institutions participate in the swap market primarily to

Accepted Answer

A)  serve as an intermediary by matching up two parties in a swap.
B)  serve as a dealer by taking the counterparty position in a swap.
C)  reduce interest rate risk.
D)  none of the aboveE) A) and B)
F) All of the above

Question 3

A firm is involved in an agreement in which it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has

Accepted Answer

A)  purchased an interest rate cap.
B)  sold an interest rate cap.
C)  purchased an interest rate floor.
D)  sold an interest rate floor.E) B) and C)
F) A) and D)

Question 4

An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.

Accepted Answer

A) True 
 B)False

Question 5

An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index.

Accepted Answer

A) True 
 B)False

Question 6

In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions.

Accepted Answer

A)  many; lower
B)  many; higher
C)  few; lower
D)  few; higherE) B) and C)
F) A) and D)

Question 7

The same types of risks that apply to interest rate swaps may also apply to currency swaps, except that currency swaps are not subject to basis risk.

Accepted Answer

A) True 
 B)False

Question 8

A plain vanilla swap is especially beneficial when interest rates are expected to

Accepted Answer

A)  rise consistently.
B)  decline consistently.
C)  be stable.
D)  rise and then decline.E) C) and D)
F) A) and C) A

Question 9

A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time.

Accepted Answer

A)  plain vanilla
B)  zero-coupon-for-floating
C)  forward
D)  seasoned vanilla
E)  putableF) C) and D)
G) B) and E)

Question 10

An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate.

Accepted Answer

A) True 
 B)False

Question 11

If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments.

Accepted Answer

A) True 
 B)False

Question 12

Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ____ than ____ and therefore were adversely affected by ____ interest rates.

Accepted Answer

A)  assets; liabilities; increasing
B)  liabilities; assets; decreasing
C)  liabilities; assets; increasing
D)  none of the aboveE) A) and D)
F) B) and D)

Question 13

When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it

Accepted Answer

A)  can match up two parties but cannot take a position in the swap.
B)  can match up two parties or can take a position in the swap.
C)  cannot match up two parties and cannot take a position in the swap.
D)  cannot match up two parties but can take a position in the swap.E) A) and B)
F) B) and C)

Question 14

An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.

Accepted Answer

A) True 
 B)False

Question 15

A ____ swap allows the party making floating-rate payments to terminate the swap prior to maturity.

Accepted Answer

A)  zero coupon-for-floating
B)  forward
C)  callable
D)  putableE) C) and D)
F) A) and D)

Question 16

Assume a financial institution that has rate-sensitive liabilities and rate-insensitive assets. If interest rates are expected to decline consistently, this institution would benefit by negotiating a(n)

Accepted Answer

A)  forward swap.
B)  callable swap.
C)  extendable swap.
D)  none of the aboveE) A) and D)
F) A) and C) D

Question 17

An interest rate swap agreement indicates the ____ value, which represents the principal amount to which interest rates are applied to determine the interest payments involved.

Accepted Answer

A)  vanilla
B)  LIBOR
C)  programmed
D)  notionalE) None of the above
F) A) and C)

Question 18

If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments.

Accepted Answer

A)  fixed-rate; floating-rate
B)  floating-rate; fixed rate
C)  stock dividend; fixed-rate
D)  stock dividend; floating rateE) B) and C)
F) All of the above A

Question 19

AIG's financial problems during the credit crisis were attributed to:

Accepted Answer

A)  its weak returns on its investments in junk bonds.
B)  its potential losses from its life insurance policies.
C)  fraud from avoiding taxes on its gains from credit default swaps.
D)  its potential losses from credit default swaps.E) A) and B)
F) A) and C)

Question 20

A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately.

Accepted Answer

A) True 
 B)False

Exam 15: Swap Markets

According to the text, any political aspects that prevent a counterparty on a swap from meeting its payment obligations represent

Correct AnswerverifiedShow Answer

Savings institutions participate in the swap market primarily to

Correct AnswerverifiedShow Answer

A firm is involved in an agreement in which it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has

Correct AnswerverifiedShow Answer

An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.

Correct AnswerverifiedShow Answer

An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index.

Correct AnswerverifiedShow Answer

In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions.

Correct AnswerverifiedShow Answer

The same types of risks that apply to interest rate swaps may also apply to currency swaps, except that currency swaps are not subject to basis risk.

Correct AnswerverifiedShow Answer

A plain vanilla swap is especially beneficial when interest rates are expected to

Correct AnswerverifiedA

A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time.

Correct AnswerverifiedShow Answer

An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate.

Correct AnswerverifiedShow Answer

If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments.

Correct AnswerverifiedShow Answer

Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ____ than ____ and therefore were adversely affected by ____ interest rates.

Correct AnswerverifiedShow Answer

When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it

Correct AnswerverifiedShow Answer

An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.

Correct AnswerverifiedShow Answer

A ____ swap allows the party making floating-rate payments to terminate the swap prior to maturity.

Correct AnswerverifiedShow Answer

Assume a financial institution that has rate-sensitive liabilities and rate-insensitive assets. If interest rates are expected to decline consistently, this institution would benefit by negotiating a(n)

Correct AnswerverifiedD

An interest rate swap agreement indicates the ____ value, which represents the principal amount to which interest rates are applied to determine the interest payments involved.

Correct AnswerverifiedShow Answer

If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments.

Correct AnswerverifiedA

AIG's financial problems during the credit crisis were attributed to:

Correct AnswerverifiedShow Answer

A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately.

Correct AnswerverifiedShow Answer

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In a period when interest rates are expected to rise, institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be under these conditions.

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A

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Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive than and therefore were adversely affected by interest rates.

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D

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If a firm negotiates a plain vanilla swap, it will provide payments in exchange for payments.

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A

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