Question 1

$\begin{array}{lll}&#10;&\text { Fixed-Rate } & \text { Floating-Rate } \&#10;&\text { Borrowing Cost } & \text { Borrowing Cost }\&#10;\text { Company: A} & 6 \% & \text { LIBOR } \&#10;\text { Company: B} & 5 \% & \text { LIBOR }-0.5&#10;\end{array}$&#10;&#10;-If company A and company B share the interest savings from the interest rate swap equally,company A will pay after the swap on its preferred debt:&#10;A) 5.5%.&#10;B) 5.75%.&#10;C) LIBOR - 0.75%.&#10;D) LIBOR.

Accepted Answer

Company A has a comparative disadvantage in fixed-rate borrowing, while Company B has a comparative disadvantage in floating-rate borrowing. By swapping, they can both benefit. The total cost savings from the swap is 0.5% (6% - 5% = 1% and LIBOR - (LIBOR - 0.5%) = 0.5%). Sharing the savings equally, each company saves 0.25%. Therefore, Company A's effective rate after the swap is 6% - 0.25% = 5.75%.

Question 2

Company A swaps fixed-rate US dollar debt with Company B for floating-rate Canadian dollar debt.This is a:&#10;A) single-currency interest rate swap.&#10;B) currency swap.&#10;C) cross-currency interest rate swap.&#10;D) None of these.

Accepted Answer

This is a cross-currency interest rate swap because it involves two different currencies (USD and CAD) and the exchange of fixed-rate debt for floating-rate debt. A single-currency interest rate swap would involve only one currency, while a currency swap would involve the exchange of not only debt but also the principal amounts in different currencies.

Question 3

Swap bank quotes 5.40-5.70 for the euro.This means the swap bank will:&#10;A) receive 5.40 percent semi-annual fixed payments against paying six-month LIBOR.&#10;B) receive 5.70 percent semi-annual fixed payments against paying six-month LIBOR.&#10;C) pay 5.70 percent semi-annual fixed payments against receiving six-month LIBOR.&#10;D) None of these.

Accepted Answer

The swap bank will receive 5.70 percent semi-annual fixed payments against paying six-month LIBOR. This is because the quote given is "5.40-5.70" which means the swap bank can choose to pay fixed semi-annual payments at either 5.40% or 5.70%. Since the quote is closer to 5.70%, it is the more likely choice for the swap bank.

Question 4

$\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text {french interest rate }\&#10;& \text { on CS loans } & \text { on euro loans } \&#10;\text { Canadian firm } & 5 \% & 5.5 \% \mathrm{a} \&#10;\text { Freneh firm } & 6 \% & 5.5 \%&#10;\end{array}$&#10;The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars.&#10;&#10;-Which firms will benefit from a currency swap?&#10;A) Neither firm.&#10;B) The Canadian firm only.&#10;C) Both firms.&#10;D) Need more information.

Accepted Answer

The answer of \(\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text...

Question 5

$\begin{array}{lll}&#10;&\text { Fixed-Rate } & \text { Floating-Rate } \&#10;&\text { Borrowing Cost } & \text { Borrowing Cost }\&#10;\text { Company: A} & 6 \% & \text { LIBOR } \&#10;\text { Company: B} & 5 \% & \text { LIBOR }-0.5&#10;\end{array}$&#10;&#10;-Calculate the quality spread differential (QSD):&#10;A) 0.50%.&#10;B) 1.00%.&#10;C) 1.50%.&#10;D) 2.00%.

Accepted Answer

The quality spread differential (QSD) is the difference between the fixed-rate borrowing cost and the floating-rate borrowing cost. For Company A, the QSD is 6% - LIBOR. For Company B, the QSD is 5% - (LIBOR - 0.5) = 5% - LIBOR + 0.5 = 5.5% - LIBOR. Therefore, the QSD differential is 5.5% - LIBOR - (6% - LIBOR) = 0.5%.

Question 6

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 bank.
(v)- It can be an independent operator.

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

Accepted Answer

Swap banks can indeed be a variety of financial institutions including international commercial banks, investment banks, merchant banks, or independent operators, and they facilitate swaps between counterparties.

Question 7

$\begin{array}{lll}&#10;&\text { Fixed-Rate } & \text { Floating-Rate } \&#10;&\text { Borrowing Cost } & \text { Borrowing Cost }\&#10;\text { Company: A} & 6 \% & \text { LIBOR } \&#10;\text { Company: B} & 5 \% & \text { LIBOR }-0.5&#10;\end{array}$&#10;&#10;-What rate would company A have to pay on its floating rate debt so that an interest rate swap would no longer benefit each party?&#10;A) LIBOR - 0.5&#10;B) LIBOR&#10;C) LIBOR + 0.5&#10;D) An interest swap is always beneficial for both parties involved.

Accepted Answer

In an interest rate swap, the benefit for both parties ceases when the comparative advantage of one party over the other in either fixed or floating rate borrowing is fully exploited. Here, Company A has a comparative advantage in fixed-rate borrowing (6% vs. 5% for Company B), and Company B has a comparative advantage in floating-rate borrowing (LIBOR - 0.5% vs. LIBOR for Company A). The swap would no longer be beneficial if Company A's floating rate borrowing cost aligns with Company B's advantage, which is LIBOR - 0.5%. Therefore, for the swap to no longer benefit each party, Company A's rate would need to be LIBOR + 0.5%, eliminating the spread that makes the swap beneficial.

Question 8

Which of the following swaps are also knows as &#34;plain vanilla&#34; swaps?&#10;A) &#34;Fixed-for-fixed&#34; single currency swap.&#10;B) &#34;Fixed-for-floating&#34; single currency swap.&#10;C) &#34;Fixed-for-fixed&#34; currency swap involving two different currencies.&#10;D) &#34;Floating -for- floating&#34; currency swap involving two different currencies.

Accepted Answer

"Fixed-for-floating" single currency swaps are the most commonly traded and straightforward type of interest rate swaps, also known as "plain vanilla" swaps. The other swaps listed involve either two different currencies or floating interest rates, which are less common and more complex.

Question 9

Which of the following are possible swaps?&#10;A) Floating-for-floating.&#10;B) Zero-coupon for floating.&#10;C) Fixed for floating.&#10;D) All of these.

Accepted Answer

All of the given options are possible swaps. A floating-for-floating swap involves exchanging two different floating interest rates. A zero-coupon for floating swap involves exchanging a fixed future payout (zero-coupon) for a floating interest rate. A fixed-for-floating swap involves exchanging a fixed interest rate for a floating interest rate. Therefore, all options are possible swaps.

Question 10

Examples of &#34;single-currency interest rate swap&#34; and &#34;cross-currency interest rate swap&#34; is/are:&#10;A) fixed-for-floating rate interest rate swap, where one counterparty exchanges the principal payment of a floating-rate debt obligations for fixed-rate principal payment of the other counter party.&#10;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 debt service obligations of the other counter party denominated in same currency.&#10;C) 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.&#10;D) None of these

Accepted Answer

A single-currency interest rate swap involves both parties exchanging interest payments on a single currency, and a fixed-for-floating rate swap fits this description. Cross-currency interest rate swaps involve exchanging interest payments on two different currencies, and a fixed-for-fixed rate swap (currency swap) fits this description. However, option B specifies that both parties are exchanging debt service obligations in the same currency, which does not involve an interest rate component and is therefore not a type of interest rate swap. Option A also describes a fixed-for-floating rate swap, but it involves exchanging principal payments instead of interest payments.

Question 11

Which combination of the following statements is true about the risks that a swap dealer confronts:
(i)- interest rate risk
(ii)- basis risk
(iii)- exchange rate risk
(iv)- mismatch risk
(v)- sovereign risk

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

Accepted Answer

The answer of Which combination of the following statements is...

Question 12

XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SF10,000,000 and receive LIBOR - ½ percent.As of the third reset date (i.e.mid-way through the 6 year agreement),calculate the price of the swap,assuming that the fixed-rate at which XYZ can borrow has increased to 10%.(Round your final answer to nearest SF and Do not round intermediate calculations)

A) SF248,685
B) SF900,000
C) SF2,700,000
D) SF7,300,000

Accepted Answer

The answer of XYZ Corporation enters into a 6-year interest...

Question 13

The term interest rate swaps:&#10;A) refers to a &#34;single-currency interest rate swap&#34; shortened to &#34;interest rate swap&#34;.&#10;B) involves &#34;counterparties&#34; who make a contractual agreement to exchange cash flows at periodic intervals.&#10;C) can be &#34;fixed-for-floating rate&#34; or &#34;fixed-for-fixed rate&#34;.&#10;D) All of these.

Accepted Answer

The answer of The term interest rate swaps:&#10;A) refers to...

Question 14

Find the QSD.&#10;A) 0%&#10;B) 0.5%&#10;C) 0.8%&#10;D) 1%

Accepted Answer

The answer of Find the QSD.&#10;A) 0%&#10;B) 0.5%&#10;C) 0.8%&#10;D) 1%...

Question 15

The primary reasons for a counterparty to use a currency swap are:&#10;A) to hedge and to speculate.&#10;B) to play in the futures and forward markets.&#10;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 rate exposure.&#10;D) to gamble in the futures and forward markets.

Accepted Answer

The answer of The primary reasons for a counterparty to...

Question 16

Suppose ABC Investment Banker,Ltd.is quoting swap rates as follows: 7.50 - 7.85 percent annually against six-month dollar LIBOR for dollars,and 11.00 - 11.30 percent annually against six-month dollar LIBOR for British pound sterling.ABC would enter into a $/£ currency swap in which:

A) it would pay annual fixed-rate dollar payments of 7.85% in return for receiving annual fixed-rate £ payments at 11.3%.
B) it will receive annual fixed-rate dollar payments at 7.5% against paying annual fixed-rate £ payments at 11%.
C) it would pay annual fixed-rate dollar payments of 7.5% in return for receiving annual fixed-rate £ payments at 11.3%.
D) None of these.

Accepted Answer

The answer of Suppose ABC Investment Banker,Ltd.is quoting swap rates...

Question 17

Find the profit of the swap bank next year if next year the exchange rate will be $1.65/&#163;.&#10;A) $2000&#10;B) $2500&#10;C) $3000&#10;D) $3500

Accepted Answer

The answer of Find the profit of the swap bank...

Question 18

Some of the risks that a swap dealer confronts are &#34;basis risk&#34; and &#34;sovereign risk.&#34; They are defined as:&#10;A) &#34;basis risk refers&#34; to the probability that a country will impose exchange restrictions on a currency involved in a swap, and &#34;sovereign risk refers&#34; to a situation in which the floating rates of the two counterparties are not pegged to the same index.&#10;B) &#34;basis risk refers&#34; to a situation in which the floating rates of the two counterparties are not pegged to the same index and &#34;sovereign risk&#34; refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.&#10;C) &#34;basis risk&#34; refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and &#34;sovereign risk&#34; refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.&#10;D) &#34;basis risk&#34; refers to the risk of fluctuating exchange rates, and &#34;sovereign risk refers&#34; to a situation in which the floating rates of the two counterparties are not pegged to the same index.

Accepted Answer

The answer of Some of the risks that a swap...

Question 19

Use the following information to calculate the quality spread differential (QSD): $\begin{array}{lll}&\text { Fixed-Rate } & \text { Floating-Rate } \\&\text { Borrowing Cost } & \text { Borrowing Cost }\\\text { X Company: } & 10 \% & \text { LIBOR } \\\text { Y Company: } & 12 \% & \text { LIBOR }+1.5\end{array}$

A) 0.50%
B) 1.00%
C) 1.50%
D) 2.00%

Accepted Answer

The answer of Use the following information to calculate the...

Question 20

Which of the following is NOT true about swap banks?&#10;A) A swap bank can be an international commercial bank.&#10;B) A swap bank can be an investment bank.&#10;C) A swap bank can be a central bank.&#10;D) A swap bank can be an independent operator.

Accepted Answer

The answer of Which of the following is NOT true...

Question 21

$\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text {french interest rate }\&#10;& \text { on CS loans } & \text { on euro loans } \&#10;\text { Canadian firm } & 5 \% & 5.5 \% \mathrm{a} \&#10;\text { Freneh firm } & 6 \% & 5.5 \%&#10;\end{array}$&#10;The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars.&#10;&#10;-Find QSD&#10;A) 1%&#10;B) 1.2%&#10;C) 2.2%&#10;D) 3.2%

Accepted Answer

The answer of \(\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text...

Question 22

The following information is given.&#10;   Boeing and Airbus have agreed to swap their debt payments so that each firm gets its preferred debt terms.Each firm will save the same amount in percentage terms.&#10;a)Does Boeing prefer fixed or floating rate debt? What rate does it pay on its preferred debt?&#10;b)Does Airbus prefer fixed or floating rate debt? What rate does it pay on its preferred debt?&#10;c)What are the total interest savings available in this interest rate swap?&#10;d)Which company has the advantage in fixed rate debt?

Accepted Answer

The answer of The following information is given.&#10;  ...

Question 23

$\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text {french interest rate }\&#10;& \text { on CS loans } & \text { on euro loans } \&#10;\text { Canadian firm } & 5 \% & 5.5 \% \mathrm{a} \&#10;\text { Freneh firm } & 6 \% & 5.5 \%&#10;\end{array}$&#10;The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars.&#10;&#10;-If the Canadian and the French firms share the interest savings from the currency swap equally,the Canadian firm will pay on its French debt after the swap:&#10;A) The same as without the swap.&#10;B) 5%.&#10;C) 5.5%.&#10;D) 6%.

Accepted Answer

The answer of \(\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text...

Question 24

$\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text {french interest rate }\&#10;& \text { on CS loans } & \text { on euro loans } \&#10;\text { Canadian firm } & 5 \% & 5.5 \% \mathrm{a} \&#10;\text { Freneh firm } & 6 \% & 5.5 \%&#10;\end{array}$&#10;The Canadian firm wants to borrow in euros and the French firm wants to borrow in Canadian dollars.&#10;&#10;-What will be the annual GROSS interest payment of firm A to the swap bank? (where &#34;GROSS&#34; means that it does not take into account the payment made by the swap bank to firm A on the loan that firm A made to the swap bank)&#10;A) &#163;66,000&#10;B) &#163;76,000&#10;C) $72,000&#10;D) $216,000

Accepted Answer

The answer of \(\begin{array}{lcc} &#10;&\text { Canadian interest rate }&\text...

Question 25

The following information is given:&#10;   Both parties want to engage in an interest rate swap.Assume that S Bank will arrange for an interest rate swap between X Company and Y Company for 0.1%.Also,assume that X Company gets 2/3 of the interest savings available.&#10;a)Which company has a better credit rating?&#10;b)What is the quality spread differential?&#10;c)What is X Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?&#10;d)What is Y Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?&#10;e)Illustrate the cash flows from this swap.Assume that X Company pays LIBOR to S Bank.

Accepted Answer

The answer of The following information is given:&#10;  ...

Question 26

ABC Corporation has entered into a 10-year interest rate swap with a swap bank.ABC Corp.pays the swap bank a fixed-rate of 6 percent annually on a notional amount of EUR100,000,000 and receives LIBOR _- ½ percent.What is the price of the swap on the seventh reset date,assuming that the fixed-rate at which ABC can borrow has decreased to 5%.

Accepted Answer

The answer of ABC Corporation has entered into a 10-year...

Question 27

Canada Corporation enters into a 2-year interest rate swap with Bank A in which it agrees to pay the swap bank a fixed-rate of 5 percent annually on a notional amount of US$1,000,000 and receive LIBOR - 1 percent.Determine the price of the swap on the first reset date,assuming that the fixed-rate at which Canada Corporation can borrow has stayed unchanged.

Accepted Answer

The answer of Canada Corporation enters into a 2-year interest...

Deck 10: Interest Rate and Currency Swaps