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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
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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
13. Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a
fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4
percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year,
and there is no netting.
a. party A pays $2,500,000, and party B pays SF1,400,000
b. party A pays SF1,400,000, and party B pays $2,500,000
c. party A pays SF1,750,000, and party B pays SF1,400,000
d. party A pays $2,500,000, and party B pays $2,000,000
e. party A pays $50 million, and party B pays SF35 million
14. Find the net payment on an equity swap in which party A pays the return on a stock index and party B pays a
fixed rate of 6 percent. The notional amount is $10 million. The stock index starts off at 1,000 and is at
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1,055.15 at the end of the period. The interest payment is calculated based on 180 days in the period and 360
days in the year.
a. party B pays $851,500
b. parry B pays $48,500
c. party B pays $251,500
d. party A pays $251,500
e. party A pays $851,500
15. Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock
index 1 and party B pays the return on stock index 2. The notional amount is $25 million. Stock index 1 starts
the period at 1500 and goes up to 1600 at the end of the period. Stock index 2 starts the period at 3500 and
goes up to 3300 at the end of the period.
a. The party paying index 1 pays about $238,000
b. The party paying index 2 pays about $238,000
c. The party paying index 2 pays about $3.095 million
d. The party paying index 1 pays about $25 million
e. The party paying index 1 pays about $3.095 million
16. Find the fixed rate on a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year)
for one year. The prices of Eurodollar zero coupon bonds are 0.9756 (180 days) and 0.9434 (360 days).
a. 5.9 percent
b. 5 percent
c. 6 percent
d. 5.5 percent
e. 2.95 percent
17. Use the information in problem 16 to find the fixed rate on an equity swap in which the stock index is at
2,000.
a. 5.9 percent
b. 5 percent
c. 6 percent
d. 2.95 percent
e. 3.5 percent
18. Find the market value of a plain vanilla swap from the perspective of the fixed rate payer in which the
upcoming payment is in 30 days, and there is one more payment 180 days after that. The fixed rate is 7
percent and the upcoming floating payment is at 6.5 percent. The notional amount is $15 million. Assume 360
days in a year. The prices of Eurodollar zero coupon bonds are 0.9934 (30 days) and 0.9528 (210 days).
a. the fixed payer pays $31,763.75
b. the fixed payer pays $71,527.50
c. the floating payer pays $49,500
d. the floating payer pays $194,228
e. none of the above
19. Which of the following statements about constant maturity swaps is not true?
a. the CMT rate is linked to a U. S. treasury security of equivalent maturity
b. the typical maturity is 2 to 5 years
c. the maturity is constant
d. one rate is based on a security of a longer rate than the settlement period
e. the swap is a type of interest rate swap
20. Which of the following is not a way to terminate a swap:
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a. the two counterparties cash settle the market value
b. enter into an opposite swap with another counterparty
c. hold the swap to its maturity date
d. use a forward contract or option on the swap to enter into an offsetting swap
e. borrow the notional amount and pay off the counterparty
21. An equity swap with fixed interest payments has two payments remaining. The first occurs in 30 days and the
second occurs in 210 days. The discount factors are 0.9934 (30 days) and 0.9528 (210 days). The upcoming
fixed payment is at 4 percent and is based 180 days in a 360-day year. The equity index was at 1150 at the
beginning of the period and is now at 1152.75. The notional amount is $60 million. Find the approximate
value of the equity swap from the perspective of the party making the equity payment and receiving the fixed
payment.
a. $143,478
b. $642,000
c. -$143,478
d. -$642,000
e. -$496,560
22. The present value of the series of dollar payments in a currency swap per $1 notional amount is $0.03. The
present value of the series of euro payments in the same currency swap per €1 is €0.0225. The current
exchange rate is $1.05 per euro. If the swap has a notional amount of $100 million and €105 million, find the
market value of the swap from the perspective of the party paying euros and receiving dollars.
a. $519,375
b. –$2,480,625
c. $3,000,000
d. –$3,000,000
e. –$519,375
23. Equity swaps can be used for all of the following except:
a. to synthetically buy stock
b. to synthetically sell stock
c. to convert dividends into capital gains
d. to synthetically re-align an equity portfolio
e. none of the above
24. Which of the following statements about diff swaps is true?
a. they involve interest payments in separate currencies
b. they are based on the difference between interest rates in two countries
c. they are based on the difference between interest rates of different maturities
d. the notional amount reduces throughout the life of the swap
e. the notional amount increases throughout the life of the swap
25. Interest rate swaps can be used for all of the following purposes except:
a. to borrow at the prime rate
b. to convert a fixed-rate loan into a floating-rate loan
c. to convert a floating-rate loan into a fixed-rate loan
d. to speculate on interest rates
e. to hedge interest rate risk
26. The value of a pay-fixed, receive floating interest rate swap is found as the value of a
a. floating-rate bond times the value of a fixed-rate bond.
b. floating-rate bond plus the value of a fixed-rate bond.
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c. floating-rate bond minus the value of another floating-rate bond.
d. fixed-rate bond minus the value of another fixed-rate bond.
e. floating-rate bond minus the value of a fixed-rate bond.
27. A basis swap is priced by adding a spread to the higher rate or subtracting a spread from the lower rate.
This spread is found as
a. the difference between the floating rate on a plain vanilla swap based on one of the rates and the
fixed rate on a plain vanilla swap based on the other rate.
b. the addition of the fixed rate on a plain vanilla swap based on one of the rates and the fixed rate on
a plain vanilla swap based on the other rate.
c. the difference between the fixed rate on a plain vanilla swap based on one of the rates and the
fixed rate on a plain vanilla swap based on the other rate.
d. the difference between the floating rate on a plain vanilla swap based on one of the rates and the
floating rate on a plain vanilla swap based on the other rate.
e. none of the above correctly explain how this spread is found
28. The value of a pay-fixed, receive-floating interest rate swap is found as the value of a
a. floating-rate bond minus the value of a fixed-rate bond.
b. fixed-rate bond minus the value of a floating-rate bond.
c. floating-rate bond minus the value of another floating-rate bond.
d. fixed-rate bond minus the value of another fixed-rate bond.
e. none of the above correctly identify how this value is found.
29. Swap payments typically involve adjusting for the fraction of the year in some fashion. This adjustment is
known as
a. the compounding convention
b. the accrual period
c. the fraction convention
d. the money market convention
e. the payment period
30. The combination of a pay euro fixed and receive dollar fixed swap with a pay dollar floating and receive
euro fixed results in
a. a currency swap
b. a currency swap, receive euro fixed and pay euro floating
c. an interest rate swap, pay dollar fixed and receive dollar floating
d. an interest rate swap, receive euro fixed and pay euro floating
e. an interest rate swap, pay dollar floating and receive dollar fixed
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CHAPTER 11: SWAPS
TRUE/FALSE TEST QUESTIONS
T F 1. Swap payments are always either fixed or floating but never both.
T F 2. The notional amount is never exchanged in an interest rate swap.
T F 3. Currency swap volume is greater than equity swap volume.
T F 4. Interest rate swap volume is greater than currency swap volume because virtually ever
business is exposed to interest rate risk.
T F 5. In an interest rate swap, the upcoming floating payment will not be determined until the end
of the current settlement period.
T F 6. A swap involving two floating rates is called a basis swap.
T F 7. The value of a floating-rate bond is par on each interest payment date.
T F 8. The market value of a swap is zero between settlement dates.
T F 9. A company that borrows at a floating rate and uses a swap to convert into a fixed rate is
assuming some credit risk.
T F 10. In an index amortizing swap, the notional amount increases throughout the life of the swap.
T F 11. A currency swap with no notional amount can be used to synthetically convert a bond
issued in one currency into a bond issued in another currency.
T F 12. An interest rate swap is a special case of a currency swap with both currencies being the
same.
T F 13. The fixed rates on a currency swap are the same as the fixed rates on plain vanilla interest
rate swaps in the respective currencies.
T F 14. Currency swaps can result in savings for a party due to the assumption of credit risk.
T F 15. Like interest rate and currency swaps, equity swap payments are always positive.
T F 16. A strategy to replicate an equity swap involving two stock indices is to buy one index and
sell short the other.
T F 17. The level of the stock is irrelevant to the pricing of equity swaps.
T F 18. A risk of equity swaps is that the company will pay dividends.
T F 19. A plain vanilla interest rate swap is equivalent to issuing a fixed-rate bond and using the
proceeds to buy a floating-rate bond or vice versa.
T F 20. A swap can be terminated by having the party owing the greater amount make a cash
payment.
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T F 21. If a swap is effectively terminated by entering into the opposite swap with another
counterparty, the credit risk will be eliminated.
T F 22. The settlement period in a swap refers to the full life of the swap.
T F 23. Swaps are created in the over–the–counter market.
T F 24. By adding a hypothetical notional amount to a swap, one can treat the cash flows like those
of a bond.
T F 25. At the beginning of the life of the swap, the present values of the two stream of payments of
each counterparty is the same.
T F 26. Since 1998, the notional amount of interest rate swaps outstanding has always increased
each year.
T F 27. Since 1998, the gross market value of currency swaps outstanding has always increased
each year.
T F 28. Interest rate swaps can be viewed as a portfolio of forward contracts.
T F 29. Currency swaps can be viewed as a pair of bonds with each bond denominated in a
different currency.
T F 30. Pricing a currency swap means to find the fixed rates in the two currencies. These fixed
rates are the same as the fixed rates on plain vanilla swaps in the respective currencies.
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CHAPTER 11