TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 31
MARKET FOR INTEREST RATE RISK TRANSFER VEHICLES:
OTC INSTRUMENTS
MULTIPLE CHOICE
1. Commercial banks and investment banks customize for their clients interest rate contracts
that are useful for:
[E]
2. A common OTC option between two sectors of the market is an option on:
[M]
3. An option to purchase an option is referred to as a(n):
[E]
4. An option that allows the option buyer to purchase a put option is called:
5. When two parties agree at a specified future date to exchange an amount of money based
on a reference interest rate and a notional principal amount, the agreement is commonly
referred to as:
[M]
6. In an interest rate swap, the position of the floating-rate payer is equivalent to a:
[M]
7. The use of an interest rate swap to change the cash flow nature of liabilities is known as:
[E]
8. The initial motivation for the interest rate swap market was borrower exploitation of what
was perceived to be:
[M]
9. Interest rate swaps:
10. Intermediaries involved in interest rate swaps performed the function of a:
[M]
11. The date the a swap begins accruing interest is called:
[M]
12. The trade date is the date:
[M]
13. The value of an interest rate swap is the:
[M]
14. An agreement between two parties whereby 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 is known as a(n):
15. Options on interest rate caps are called:
[M]
16. Interest rate caps and floors can be combined to create a(n):
[M]
17. The only party that is required to perform in an interest rate agreement is the:
[M]
18. In an interest rate agreement, the predetermined interest rate level is called the:
[M]
19. Participants in financial markets use interest rate swaps to:
20. One explanation for the rapid growth of the swap market is the opportunity for credit
arbitrage, which arises because of:
[M]
TRUE/FALSE
1. With all customized interest rate derivatives there is counterparty risk.
[E]
2. The buyer of a compound option pays a front fee.
[M]
3. Credit risk includes default risk, downgrade risk, and credit spread risk.
[E]
4. Credit default swaps are used by an investor to shift credit exposure to a credit protection
seller.
[M]
5. Derivative instruments that provide protection against credit risk are referred to as credit
derivatives.
[E]
ESSAY QUESTIONS
1. Explain the reasons for why OTC interest rate options are used by market participants.
Key Issues:
2. What is an interest rate swap, and what important functions does it perform?
Key Issues:
3. What is an option on a swap, and how can it be used?
Key Issues: