An Introduction To Derivatives And Risk Management 10th Edition By Don M. – Test Bank

CHAPTER 11: SWAPS

MULTIPLE CHOICE TEST QUESTIONS

1. The difference between the swap rate and the rate on a Treasury security of the same maturity is called the
a. swap spread
b. risk premium
c. swap basis
d. settlement spread
e. LIBOR

2. Interest rate swap payments are made
a. on the last day of the quarter
b. on the first day of each month
c. at whatever dates are agreed upon by the counterparties
d. on the 15th of the agreed-upon months
e. on the last day of the month

3. To determine the fixed rate on a swap, you would
a. use put-call parity
b. price it as the issuance of a fixed rate bond and purchase of a floating rate bond or vice versa
c. use the same fixed rate as that of a zero coupon bond of equivalent maturity
d. use the continuously compounded rate for the shortest maturity bond
e. none of the above

4. Which of the following is not a type of swap?
a. settlement swaps
b. commodity swaps
c. interest rate swaps
d. equity swaps
e. currency swaps

5. The underlying amount of money on which the swap payments are made is called
a. settlement value
b. market value
c. notional amount
d. base value
e. equity value

6. The most basic and common type of swap is called
a. basis swap
b. plain vanilla swap
c. plain paper swap
d. commercial swap
e. bond swap

7. An interest rate swap with both sides paying a floating rate is called a
a. plain vanilla swap
b. two-way swap
c. floating swap
d. spread swap
e. basis swap

8. Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be combined with this swap to produce a swap to produce a plain vanilla swap in currency B.
a. pay currency B floating, receive currency A fixed
b. pay currency B fixed, receive currency A floating
c. pay currency B fixed, receive currency A fixed
d. pay currency B floating, receive currency A floating
e. none of the above

9. For a currency swap with $10 million notional amount, the notional amount in British pounds if the exchange rate is $1.55 is (approximately)
a. ₤11.55 million
b. ₤15.5 million
c. ₤10 million
d. ₤6.45 million
e. none of the above

10. A currency swap without the exchange of notional amount is most likely to be used in what situation?
a. a company issuing a bond
b. a company generating cash flows in a foreign currency
c. a company arranging a loan
d. a dealer trying to hedge a currency option
e. none of the above

11. Which of the following distinguishes equity swaps from currency swaps?
a. equity swap payments are always hedged
b. equity swap payments are made on the first day of the month
c. equity swap payments can be negative
d. equity swap payments have more credit risk
e. none of the above

12. Find the upcoming net payment in a plain vanilla interest rate swap in which the fixed party pays 10 percent and the floating rate for the upcoming payment is 9.5 percent. The notional amount is $20 million and payments are based on the assumption of 180 days in the payment period and 360 days in a year.
a. fixed payer pays $1,950,000
b. fixed payer pays $950,000
c. floating payer pays $1 million
d. floating payer pays $50,000
e. fixed payer pays $50,000