TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 12
INTRODUCTION TO THE SWAPS, CAPS, AND FLOORS MARKETS
MULTIPLE CHOICE
1. An agreement whereby two parties agree to exchange periodic payments is called:
[E]
2. The dollar amount of the payments exchanged in a swap agreement is based on some
predetermined dollar principal, which is called:
[E]
3. In an interest rate swap, the counterparties swap payments in the same currency based on:
[E]
4. When one party is exchanging a payment based on an interest rate and the other party
based on the return of some equity index, the swap agreement is called:
5. A swap can be thought of as a:
[M]
6. Swaps are beneficial because:
[M]
7. Participants in financial markets use interest rate swaps to:
[M]
8. In a swap, two parties are exchanging payments. The risk that one party will fail to meet
its obligation to make payments is called:
[E]
9. When the seller agrees to pay the buyer if the designated reference exceeds a
predetermined level, the agreement is referred to as:
10. When the seller agrees to pay the buyer if a designated reference falls below a
predetermined level, the agreement is called:
[E]
11. In an interest rate cap or floor agreement, the predetermined level of the reference rate
[M]
12. In a cap or floor, the only party that is required to perform is the:
[M]
13. A cap and a floor can be viewed simply as:
[M]
14. The buyer of a cap benefits if the designated reference:
15. The buyer of a floor benefits if the designated reference:
[M]
16. A cap is equivalent to:
[E]
17. A floor is equivalent to:
[E]
18. When two parties agree to swap payments based on different currencies, this type of
swap is called:
TRUE/FALSE
1. Swaps are currently traded in the over-the-counter market and not on any organized
exchange.
[E]
2. Swaps can be used for asset/liability management and the creation of securities.
3. Swaps, caps, and floors have played a key role in the development of a global financial
market.
[M]
4. The swap market is now more liquid than many forward contracts, particularly long-
dated forward contracts.
[M]
5. Debt instruments created by using swaps are commonly referred as structured notes.
ESSAY QUESTIONS
1. Explain the relationship between a swap and a forward contract.
Key Issues:
2. How can swaps be used to create securities?
Key Issues:
3. Explain the relationship between a cap and a floor and an option.
Key Issues: