Test14 version 1test bank answer question for chapter PDF

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Student name:__________ 1)

The term interest rate swap

A) refers to a "single-currency interest rate swap" shortened to "interest rate swap." B) involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals.

C) can be "fixedfor-floating rate" or "floating-for-floating rate." D) all of the options

2) Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

A) fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating-rate debt obligations for fixed-rate interest payments of the other counter party. B) fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the

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debt service obligations of the other counterparty denominated in another currency. C) Both A and B D) none of the options

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3)

The primary reasons for a counterparty to use a

A) to hedge and to speculate. B) to play in the futures and forward markets. C) to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange

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currency swap are rate exposure. D) to hedge and to speculate, as well as to play in the futures and forward markets.

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4)

The size of the currency swap market (at year-end A) immeasurable. B) over 24 billion dollars. C) measured by notational principal and over 24

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2018) is trillion dollars. D) none of the options

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5) Which combination of the following statements is true about a swap bank?(i) it is a generic term to describe a financial institution that facilitates swaps between counterparties(ii) it can be an international commercial bank(iii) it can be an investment bank(iv) it can be a merchant

A) (i) and (ii) B) (i), (ii) and (iii) C) (i), (ii), (iii) and (iv)

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bank(v) it can be an independent operator

D) (i), (ii), (iii), (iv) and (v)

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6)

A swap bank A)

can act as a broker, standing ready to buy and sell

swaps. B) can act as a dealer, bringing together counterparties to a swap. C) can act as a broker, bringing together counterparties to a swap, and/or as a dealer, standing ready to buy and sell swaps.

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D) only sometimes acts as a broker, bringing together counterparties to a swap, but never ever acts as a dealer, standing ready to buy and sell swaps.

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7) In the swap market, which position potentially carries greater risks, broker or dealer? risks. A) Broker B) Dealer C) They are the same swaps, therefore the same

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D)

none of the

options

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8)

Which of the following statements regarding the swap

A) As a broker, the swap bank matches counterparties but does not assume any risk of the swap. B) Today’s swap banks serve as dealers or market makers. C) A swap bank can be an international commercial

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bank are not true? bank, an investment bank, a merchant bank, or an independent operator. D) none of the options

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9) Suppose the quote for a five-year swap with semiannual payments is 8.50–8.60 percent. This means A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR. B) the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. C) the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month

dollar LIBOR, and the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying sixmonth dollar LIBOR. D) none of the options

10) Suppose the quote for a five-year swap with semiannual payments is 8.50–8.60 percent. This means

A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR B) the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. C) if the swap bank is successful in getting

counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points. D) none of the options

11) A swap bank makes the following quotes for 5-year swaps and AAA-rated firms: USD Bid

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A) The bank stands ready to pay $5.2 percent against receiving dollar LIBOR on 5-year loans. B) The bank stands ready to receive €7 percent against receiving

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dollar LIBOR on 5-year loans. C) The bank stands ready to pay €7 percent against receiving dollar LIBOR on 5-year loans.

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D)

none of the

options

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12) Suppose the quote for a five-year swap with semiannual payments is 8.50−8.60 percent in dollars and

A) the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 8.60 percent against receiving semiannual fixed-rate euro payments of 6.80. B) the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate dollar payments of 8.50. C) the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate euro

13)

6.60−6.80 percent in euro against six-month dollar LIBOR. This means payments of 6.80, and the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate dollar payments of 8.60. D) none of the options

An interest-only single currency interest rate swap D) A) is also known as a plain vanilla swap. B) is also known as an interest rate swap. C) is about as simple as swaps can get.

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all of the

options

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14) Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. Company X has a AAA

A) Company X should demand most of the QSD in any swap with Y as compensation for default risk. B) Since Y has a poor credit rating, it would not be a participant in the swap market. C) Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation. D) Company X should demand most of the QSD in

15) A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. Company X

A) If the swap bank has already contracted one leg of the swap, they should be hesitant to offer better terms to company Y. B) The swap bank could just buy the company X side of the swap. C) Company X should lobby Y to "get on board." D) If the swap bank has already contracted one leg

16) A swap bank has identified two companies with mirror-image financing needs—they both want to borrow equivalent amounts for the same amount of time. Company X

A) The swap bank could just sell the company X side of the swap. B) Company X should lobby Y to "get on board." C) Company Y should calculate the QSD and

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credit rating, but company Y's credit standing is considerably lower. any swap with Y as compensation for default risk, and Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation.

has agreed to one leg of the swap but company Y is "playing hard to get." of the swap, they should be eager to offer better terms to company Y to just get the deal done, and the swap bank could just sell the company X side of the swap.

has agreed to one leg of the swap but company Y is "playing hard to get." subtract that from their best outside offer. D) none of the options

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17) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 at a rate of LIBOR − 0.15 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. What is the value of this swap to company X? A) Company X will lose money on the deal. B) Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. C) Company X will only break even on the deal.

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D) Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.

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18) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 at a fixed rate of 9.90 percent. In exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR − 0.15 percent; What is the value of this swap to company Y?

A) Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year. B) Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year. C) Company Y will save 5 basis points per year on

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$10,000,000 = $5,000 per year. D) Company Y will only break even on the deal.

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19) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR− 0.15 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent.{MISSING IMAGE}What is the value of this swap to the swap bank?

A) The swap bank will lose money on the deal. B) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.

C) The swap bank will break even. D) none of the options

20) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

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A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent.{MISSING IMAGE}What is the value of this swap to the swap bank?

A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. B) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year.

C) The swap bank will lose money. D) none of the options

21) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

A) A = LIBOR; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = 12% B) A = 10%; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1½% C) A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; Version 1

A swap bank is involved and quotes the following for five-year dollar interest rate swaps: 10.05 percent−10.45 percent against LIBOR flat. {MISSING IMAGE}Assume both X and Y agree to the swap bank's terms. Fill in the values for A, B, C, D, E, & F on the diagram. E = 10.05%; F = LIBOR + 1½% D) A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½% 15

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22) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for;A = Company X's external borrowing rateB = Company Y's payment to X (rate)C = Company X's payment to Y (rate)D = Company Y's external borrowing rate{MISSING IMAGE}a) A = 10%; B = 11.75%; C = LIBOR - .25%; D = LIBOR + 1.5%b) A = 10%; B = 10%; C = LIBOR - .25%; D = LIBOR + 1.5%c) A = LIBOR; B = 10%; C = LIBOR - .25%; D = 12%d) A = LIBOR; B = LIBOR; C = LIBOR - .25%; D = 12%

A) Option a B) Option b

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C) Option c D) Option d

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23) Suppose ABC Investment Banker Ltd., is quoting swap rates as follows: 7.50 − 7.85 annually against six-month dollar LIBOR for dollars, and 11.00 percent−11.30 percent annually against six-month dollar LIBOR for British pound

A) it would pay annual fixed-rate dollar payments of 7.5 percent in return for receiving annual fixed-rate £ payments at 11.0 percent. B) it will receive annual fixed-rate dollar payments at 7.50 percent against paying annual fixed-rate £ payments at 11 percent. C) it would pay annual fixed-rate dollar payments of 7.5 percent in return for receiving annual fixed-rate £

sterling. ABC would enter into a $/£ currency swap in which:

payments at 11.3 percent, and it will receive annual fixed-rate dollar payments at 7.85 percent against paying annual fixed-rate £ payments at 11 percent. D) none of the options

24) Which of the following statements regarding a quality spread differential are true?

A) It is the difference between the default-risk premium differential on the fixe-rate debt and the default-risk premium differential on the floating rate debt. B) It is the sum of the default-risk premium differential and the fixed-rate debt divided by the default-risk premium differential on the floating rate debt.

25)

C) It is not possible for all parties to have a positive quality spread differential. D) none of the options

An all-in cost consists of D) A) interest expense B) transaction costs C) service charges

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all of the

options

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26)

Use the following information to calculate the quality

Company X Company Y

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spread differential (QSD). A)

0.50 percent

B) 1.00 percent C) 1.50 percent D) 2.00 percent

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27) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5

years. Their external borrowing opportunities are shown below.

Company X Company Y

A swap bank is involved and quotes the following rates fiveyear dollar interest rate swaps at 10.05 percent –10.45 percent against LIBOR flat.Assume company Y has agreed, but company X will only agree to the swap if the bank offers better terms.What are the absolute best terms the bank can offer X, given that it already booked Y?{MISSING IMAGE} D) A) 10.45% −10.45% against LIBOR flat. B) 10.45%−10.05% against LIBOR flat. C) 10.50%−10.50% against LIBOR flat.

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none of the

options

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18) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 at a fixed rate of 9.90 percent. In exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR − 0.15 percent; What is the value of this swap to company Y?

A) Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year. B) Company Y will save 45 basis points per year on

$10,000,000 = $5,000 per year. D) Company Y will only break even on the

$10,000,000 = $45,000 per year. C) Company Y will save 5 basis points per year on

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deal.

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19) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR− 0.15 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent.{MISSING IMAGE}What is the value of this swap to the swap bank?

A) The swap bank will lose money on the deal. B) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.

20) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

C) The swap bank will break even. D) none of the options

Company X Company Y

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A swap bank proposes the following interest only swap:

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X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent.{MISSING IMAGE}What is the value of this swap to the swap bank?

A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. B) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year.

C) The swap bank will lose money. D) none of the options

21) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Company X Company Y

A) A = LIBOR; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = 12% B) A = 10%; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1½% C) A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; Version 1

A swap bank is involved and quotes the following for five-year dollar interest rate swaps: 10.05 p...