Question 1

In regards to an interest rate / equity swap, which of the below statements is TRUE?

Accepted Answer

Debt instruments created by using swaps are commonly referred to as structured notes. Investment bankers often use interest rate / equity swaps to create these structured notes, which are structured debt securities that offer customized payout structures and risk profiles to investors.

Question 2

________ is an agreement between two parties in which one party, for an upfront premium, agrees to compensate the other if a designated interest rate, called the reference rate, is different from a predetermined level.

Accepted Answer

The answer of ________ is an agreement between two parties...

Question 3

The agreement is referred to as an ________ when one party agrees to pay the other if the reference rate falls below a predetermined level.

Accepted Answer

An interest rate floor is an agreement where one party agrees to pay the other if the reference interest rate falls below a predetermined level. This is often used in loan agreements or derivative contracts where the borrower wants to limit their exposure to falling interest rates. An interest rate cap is the opposite, where one party agrees to pay the other if the reference interest rate exceeds a predetermined level. Therefore, the correct answer is C) interest rate floor.

Question 4

Which of the below statements is FALSE?

Accepted Answer

In a payer swaption, the buyer has the right to enter into an interest rate swap that requires paying a fixed rate and receiving a floating rate, not the other way around.

Question 5

Which of the below statements is FALSE?

Accepted Answer

A nonconstant maturity swap tied to the CMT is not called a Constant Maturity Treasury swap, but rather a Treasury Constant Maturity swap. Therefore, statement B is false. Statements A, C, and D are true.

Question 6

Buying a ________ is equivalent to buying a package of puts on a fixed- income instrument and buying a ________ is equivalent to buying a package of calls on a fixed-income instrument.

Accepted Answer

Buying a cap is equivalent to buying a package of calls on a fixed-income instrument because it limits the maximum interest rate that can be paid, while buying a floor is equivalent to buying a package of puts because it limits the minimum interest rate that can be paid. Therefore, the correct choice is B, where the first blank is filled with "cap (long cap)" and the second blank is filled with "floor (long floor)."

Question 7

While an interest rate swap may be nothing more than a package of forward contracts, several important reasons suggest that it is not a redundant contract. Which of the below is NOT one of these?

Accepted Answer

The statement "Forward contract are a more transactionally efficient instrument since their beginning in 1955" is incorrect. While forward contracts have been around longer than interest rate swaps, interest rate swaps are still considered more transactionally efficient due to their standardized terms and maturity dates, as well as the availability of a liquid market for trading them.

Question 8

A ________ involves the sale of the swap to the original counterparty.

Accepted Answer

A buy-back, close-out sale, and cancellation all involve the sale of the swap back to the original counterparty, effectively ending the swap agreement.

Question 9

Which of the below statements is TRUE?

Accepted Answer

In a generic or plain vanilla swap, the notional principal amount does not vary over the life of the swap. Option A is incorrect as vanilla swaps are standardized contracts developed to meet the general asset/liability needs of borrowers and lenders. Option B is incorrect as a nonamortizing swap is one in which the notional principal amount remains constant over the life of the swap. Option C is incorrect as an amortizing swap is one in which the notional principal amount decreases at a predetermined way over time.

Question 10

In a ________, the party that wants out of the transaction will arrange for an additional swap in which (1) the maturity on the new swap is equal to the time remaining of the original swap, (2) the reference rate is the same, and (3) the notional principal amount is the same.

Accepted Answer

This is known as a swap reversal, where a party enters into a new swap that mirrors the original swap's terms (maturity, reference rate, and notional amount) but with the opposite position, effectively canceling out the original swap's obligations.

Question 11

The terms of an interest rate agreement include ________.

Accepted Answer

The terms of an interest rate agreement include all of these factors - reference rate, strike rate, length of the agreement, frequency of settlement, and notional principal amount.

Question 12

Which of the below statements is TRUE?

Accepted Answer

The correct statement is D, which accurately describes the three general types of transactions in the secondary market for swaps: swap reversal, swap sale (or assignment), and swap buy-back (or close-out or cancellation). This reflects the mechanisms available for managing or exiting swap positions in the market.

Question 13

In comparing a swap to a futures or forward contract where the underlying is an interest rate instrument such as a Eurodollar CD, which of the below statements is FALSE?

Accepted Answer

The answer of In comparing a swap to a futures...

Question 14

Which of the below statements is FALSE?

Accepted Answer

The statement that the seller (writer) of an interest rate cap benefits if the underlying interest rate rises above the strike rate because the buyer must compensate the buyer is false. The seller actually benefits if the underlying interest rate falls below the strike rate, as the buyer pays the seller for the difference between the strike rate and the lower actual rate.

Question 15

Which of the below statements is FALSE?

Accepted Answer

Today's swap transactions do not require the lower credit-rated entity to obtain a guarantee from a highly rated commercial bank. Instead, the counterparties enter into a legally binding agreement called a credit support annex (CSA) that outlines the terms and conditions of collateral posting to mitigate the risk of default.

Question 16

In regards to an interest rate / equity swap, which of the below statements is TRUE?

Accepted Answer

An interest rate/equity swap involves exchanging an interest rate payment stream for a stock dividend payment stream. There is a notional principal amount involved in the swap agreement, which serves as the basis for calculating the payments. Therefore, statement B is true while statements A and C are false.

Question 17

When one party agrees to pay the other if the reference rate exceeds a predetermined level, the agreement is referred to as ________.

Accepted Answer

An interest rate cap is a type of derivative contract that provides the buyer with protection against rising interest rates by agreeing to pay the buyer if the reference rate exceeds a predetermined level.

Question 18

The predetermined level of the reference interest rate is called the ________.

Accepted Answer

The predetermined level of the reference interest rate in financial contracts, especially in the context of options or derivatives, is commonly referred to as the "strike rate." This term is used to denote the specific rate at which an option can be exercised.

Question 19

Which of the below statements is TRUE?

Accepted Answer

The interest rate swap indeed allows each party to accomplish its asset/liability objective of locking in a spread. A is incorrect because the position of a fixed-rate payer is equivalent to a long position in a fixed-rate bond and a short position in a floating-rate bond, which is a correct statement. C is incorrect because the whole purpose of an interest rate swap is to alter cash flow characteristics. D is incorrect because issuing securities in the Eurodollar bond market and using the interest rate swap can indeed reduce the cost of issuing securities.

Question 20

Which of the below statements is FALSE?

Accepted Answer

This statement is false because a borrower can benefit from issuing securities in the market in which it has a comparative advantage and then swapping obligations for the desired type of financing. This is the main motivation for interest rate swaps - to allow borrowers to achieve their desired mix of fixed and floating-rate financing.

Quiz 30: OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

In regards to an interest rate / equity swap, which of the below statements is TRUE?

________ is an agreement between two parties in which one party, for an upfront premium, agrees to compensate the other if a designated interest rate, called the reference rate, is different from a predetermined level.

The agreement is referred to as an ________ when one party agrees to pay the other if the reference rate falls below a predetermined level.

Which of the below statements is FALSE?

Which of the below statements is FALSE?

Buying a is equivalent to buying a package of puts on a fixed- income instrument and buying a is equivalent to buying a package of calls on a fixed-income instrument.

While an interest rate swap may be nothing more than a package of forward contracts, several important reasons suggest that it is not a redundant contract. Which of the below is NOT one of these?

A ________ involves the sale of the swap to the original counterparty.

Which of the below statements is TRUE?

In a ________, the party that wants out of the transaction will arrange for an additional swap in which (1) the maturity on the new swap is equal to the time remaining of the original swap, (2) the reference rate is the same, and (3) the notional principal amount is the same.

The terms of an interest rate agreement include ________.

Which of the below statements is TRUE?

In comparing a swap to a futures or forward contract where the underlying is an interest rate instrument such as a Eurodollar CD, which of the below statements is FALSE?

Which of the below statements is FALSE?

Which of the below statements is FALSE?

In regards to an interest rate / equity swap, which of the below statements is TRUE?

When one party agrees to pay the other if the reference rate exceeds a predetermined level, the agreement is referred to as ________.

The predetermined level of the reference interest rate is called the ________.

Which of the below statements is TRUE?

Which of the below statements is FALSE?