Chapter 7

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CH7 Study online at https://quizlet.com/_5bfohg Which of the following is a use of a cur- rency swap? A. To exchange an investment in one cur- rency for an investment in another currency B. To exchange borrowing in one curren- cy for borrowings in another currency C. To take advantage situations where the tax rates in two countries are different D. All of the above D. All of the above 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% B. 2.7% When the company invests at LIBOR mi- nus 0.3% and then enters into a swap where it pays LIBOR and receives 3% it earns 2.7% per annum. Note that it is the bid rate that will apply to the swap. 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 pay- ments at the beginning of a currency swap and in the same direction as inter- est 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 B. The principal amounts usually flow in the opposite direction to interest pay- ments at the beginning of a currency swap and in the same direction as inter- est payments at the end of the swap. 1 / 8

CH7 Study online at https://quizlet.com/_5bfohg Company X and Company Y have been offered the following rates Fixed Rate Floating Rate Co. X: 3.5% 3-month LIBOR plus 10bp Co Y: 4.5% 3-month LIBOR plus 30 bp Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is company X's effective borrowing rate? A. 3-month LIBOR30bp B. 3.1% C. 3-month LIBOR10bp D. 3.3% A. 3-month LIBOR30bp The interest rate differential between the fixed rates is 100 basis points. The inter- est rate differential between the floating rates is 20 basis points. The difference between the interest rates differentials is 100 - 20 = 80 basis points. This is the total apparent gain from the swap to the two sides. Since the benefits are shared equally company X should be able to borrow at 40 bp less than it is currently offered in the floating rate market, i.e., at LIBOR minus 30 bp. 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 ex- change 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 C. The average of A and B The reference entity in a credit default swap is A. The buyer of protection B. The seller of protection C. The company or country whose de- fault is being insured against D. None of the above C. The company or country whose de- fault is being insured against Which of the following describes an inter- est rate swap? A. The exchange of a fixed rate bond for 2 / 8

CH7 Study online at https://quizlet.com/_5bfohg 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 D. All of the above Which of the following is true for an inter- est rate swap? A. A swap is usually worth close to zero when it is first negotiated B. Each forward rate agreement underly- ing a swap is worth close to zero when the swap is first entered into C. Comparative advantage is a valid rea- son for entering into the swap D. None of the above A. A swap is usually worth close to zero when it is first negotiated Which of the following is true for the party paying fixed in a newly negotiated inter- est rate swap when the yield curve is upward sloping? A. The early forward contracts underlying the swap have a positive value and the later ones have a negative value B. The early forward contracts underlying the swap have a negative value and the later ones have a positive value C. The swap is designed so that all for- ward rates have zero value D. Sometimes A is true and sometimes B is true B. The early forward contracts underlying the swap have a negative value and the later ones have a positive value A bank enters into a 3-year swap with company X where it pays LIBOR and re- ceives 3.00%. It enters into an offsetting swap with company Y where is receives LIBOR and pays 2.95%. Which of the following is true: C. If company X defaults, the swap with company Y continues 3 / 8

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