1
Financial institutions with ____ interest rate–sensitive liabilities than assets are ____ affected by rising interest rates.
a. more; adversely
b. fewer; adversely
c. more; favorably
more; adversely
____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party.
a. Credit
b. Basis
c. Sovereign
Credit
The option on a putable swap would most likely be exercised if interest rates
a. rise.
b. fall.
c. remain the constant.
rise.
An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.
a. True
b. False
False
Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself.
a. True
b. False
True
The option on a callable swap would most likely be exercised if interest rates
a. rise.
b. fall.
c. remain the constant.
fall.
A(n) ____ swap involves an exchange of interest payments over a swap period that does not begin until a specified future point in time.
a. forward
b. extendable
c. callable
forward
In a swap arrangement, the most common index used for floating-rate payments is the
a. coupon rate on existing bonds.
b. stock dividend rate based on a U.S. stock index.
c. London Interbank Offer Rate (LIBOR).
d. Treasury bond yield.
London Interbank Offer Rate (LIBOR).
The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates.
a. favorably; rising
b. favorably; falling
c. adversely; rising
d. adversely; falling
adversely; rising
A(n) ____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity.
a. forward
b. extendable
c. callable
d. putable
callable
Savings institutions participate in the swap market primarily to
a. serve as an intermediary by matching up two parties in a swap.
b. serve as a dealer by taking the counterparty position in a swap.
c. reduce interest rate risk.
reduce interest rate risk.
A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped.
a. rate-capped
b. zero-coupon-for-floating
c. callable
d. putable
rate-capped
____ risk prevents an interest rate swap from completely eliminating a financial institution's exposure to interest rate risk.
a. Credit
b. Basis
c. Sovereign
Basis
Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns.
a. increase; increase
b. increase; reduce
c. reduce; increase
d. reduce; reduce
reduce; reduce
A(n) ____ swap allows the party making fixed payments to extend the swap period.
a. forward
b. extendable
c. callable
d. putable
extendable
Swap transactions are only used to
a. hedge against upward interest rate movements.
b. hedge against downward interest rate movements.
c. speculate.
d. none of the above
none of the above
A firm is involved in an agreement whereby it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has
a. purchased an interest rate cap.
b. sold an interest rate cap.
c. purchased an interest rate floor.
d. sold an interest rate floor.
purchased an interest rate cap.
A firm is involved in an agreement whereby it makes payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has
a. purchased an interest rate cap.
b. sold an interest rate cap.
c. purchased an interest rate floor.
d. sold an interest rate floor.
sold an interest rate cap.
An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments.
a. callable swap
b. putable swap
c. forward swap
callable swap
An equity swap involves the exchange of
a. preferred stock for common stock.
b. interest payments for an equity position in the counterparty's firm.
c. interest payments for payments linked to the degree of change in a stock index.
interest payments for payments linked to the degree of change in a stock index.