A firm is involved in an agreement in which it receives payments in periods when a market interest rate falls below 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
C
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
C
A firm is involved in an agreement in which 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 ca
B
A firm is involved in an agreement in which it makes payments in periods when a market interest rate falls below 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 ca
D
A firm is involved in an agreement in which 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
A
An interest rate collar represents the __________ of an interest rate cap and a simultaneous __________ of an interest rate floor.
A) sale; sale
B) sale; purchase
C) purchase; purchase
D) purchase; sale
D
Firms A and B have entered into an interest rate swap. On the first payment date, Firm A owes Firm B 12 percent of $10 million, and Firm B owes Firm A 14 percent of $10 million. Most likely, this transaction will be settled in what manner?
A) Firm A will
D
Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ___________ than ____________ and therefore were adversely affected by ____________ interest rates.
A) assets; liabilities; incre
A
The Bank of Moronto has negotiated a plain vanilla swap in which it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the
D
Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1
B
Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. Assume that LIBOR i
A
Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. Assume that LIBOR i
A
In a __________, a buyer makes periodic payments to a seller in exchange for protection against the
possible default of debt securities specified in the contract.
A) default option contract
B) default futures contract
C) bankruptcy contract
D) credit defa
D
. A common maturity of a credit default swap contract is:
A) one month
B) three months
C) five years
D) 25 years
C
AIG's financial problems were attributed to:
A) its weak returns on its investments in Treasury securities.
B) its potential losses from its life insurance policies.
C) fraud from avoiding taxes on its gains from credit default swaps.
D) its potential los
D
Buyers of credit default swaps are most likely going to receive a payment from the seller of credit
default swaps when the economy:
A) is very weak.
B) is stable.
C) experiences high growth.
D) experiences low inflation.
A
Which of the following is not a typical provision of an interest rate swap?
A) the notional principal value to which the interest rates are applied to determine the interest payments involved
B) the fixed interest rate
C) the floating interest rate
D) the
D
A _________________ swap involves an exchange of interest rate payments that does not begin until
a specified future point in time.
A) plain vanilla
B) zero-coupon-for-floating
C) forward
D) seasoned vanilla
E) putable
C
If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the
swap period begins, it is probably concerned that interest rates will ___________; the counterparty is likely adversely affected by ____________ interes
B
A(n) _____________swap provides the party making the floating-rate payments with a right to
terminate the swap.
A) callable
B) extendable
C) plain vanilla
D) putable
E) none of the above
D
Interest rate______________ are interest rate derivative instruments that are normally classified
separately from interest rate swaps.
A) caps
B) floors
C) collars
D) all of the above
D
Which of the following is not a reason for financial institutions to engage in interest rate swaps?
A) to reduce interest rate risk
B) to act as an intermediary
C) to act as a dealer in swaps
D) all of the above are reasons for financial institutions to e
D