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
14) A floating-for-fixed 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
15) An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. A exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 4%. All rates an annually compounded. What is the value of the swap as a percentage of the principal when LIBOR discounting is used?
A) 0.00
B) 2.66
C) 2.06
D) 1.06
16) A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual compounding) has a remaining life of nine months. The six-month LIBOR rate observed three months ago was 4.85% with semi-annual compounding. Today’s three and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-annual compounding. If the swap has a principal value of $15,000,000, what is the value of the swap to the party receiving a fixed rate of interest?
A) $74,250
B) -$70,760
C) -$11,250
D) $103,790
17) Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla interest rate swap?
A) Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
B) Interest is paid at the end of the accrual period in a LIBOR-in-arrears swap
C) No floating interest is paid until the end of the life of the swap in a LIBOR-in-arrears swap, but fixed payments are made throughout the life of the swap
D) Neither floating nor fixed payments are made until the end of the life of the swap
18) Which of the following describes a 3-month overnight indexed swap (OIS)?
A) A fixed rate is exchanged for the overnight rate every day for three months
B) LIBOR is exchanged for the overnight rate every day for three months
C) The arithmetic average of overnight rates is exchanged for a fixed rate at the end of three months
D) The geometric average of overnight rates is exchanged for a fixed rate at the end of three months
19) Which of the following is a typical bid-offer spread on the swap rate for a plain vanilla interest rate swap?
A) 3 basis points
B) 8 basis points
C) 13 basis points
D) 18 basis points
20) Which of the following describes the five-year swap rate?
A) The rate on a five-year loan to a AA-rated company
B) The rate on a five-year loan to an A-rated company
C) The rate that can be earned over five years from a series of short-term loans to AA-rated companies
D) The rate that can be earned over five years from a series of short-term loans to A-rated companies
