Reading 74: Swap Markets and Contracts - LOS a, (Part 1) ～

答案和详解如下：

16.Consider a commercial bank with a portfolio of U.S. Treasury bonds. Why would the bank wish to engage in a swap contract? As the:

A)   interest rate decrease, the value of the bonds decreases.

B)   interest rate increases, the value of the bonds decreases.

C)   U.S. dollar increases, the value of the bonds decreases.

D)   U.S. dollar decreases, the value of the bonds decreases.

The correct answer was B)

Interest rates and bond prices are inversely related. Therefore, as interest rates increase, the value of the T-bonds decreases. The bank may wish to engage in a swap contract wherein the bank pays fixed and receives variable. In this case, as interest rates rise, the bank receives higher variable payments for making the same fixed payment in the swap. The cash flows received in the swap offset the reduction in the bond portfolio’s value.

17.The term notional principal refers to:

A)   the period of time involved.

B)   the amount swapped.

C)   the fixed interest rate.

D)   the cash interest payment.

The correct answer was B)

The notional principal is the amount swapped. Note that the notional principal does not actually change hands with plain vanilla interest rate swaps, but is used to calculate the interest payment streams to be exchanged. Notional principal does exchange hands in a foreign currency swap.

18.Which of the following choices is generally NOT part of a plain-vanilla swap transaction?

A)   Exchange of notional amount.

B)   Pay-fixed side.

C)   Swap facilitator.

D)   Tenor.

The correct answer was A)

Since the notional principal swapped is the same (and in the same currency) for both counterparties, there is no need to actually exchange cash. The counterparties are the pay-fixed and receive-fixed sides. A swap facilitator helps to bring the counterparties together and may be either an agent or a broker. The tenor of the swap is the time frame covered by the deal, or the time to maturity of the swap.

19.Consider a U.S. commercial bank that borrows funds in England for one year denominated in English pounds. Why would the investor wish to enter into a swap contract? As the:

A)   English pound decreases in value, it takes more U.S. dollars to pay off the English liability.

B)   U.S. interest rate increases, the value of the English liability increases.

C)   U.S. interest rate decreases, the value of the Australian bonds decreases.

D)   English pound increases in value, it takes more U.S. dollars to pay off the English liability.

The correct answer was D)

As the English pound increases in value, it takes more U.S. dollars to pay off the English liability, which increases the interest cost of borrowing funds denominated in English pounds.

20.Which of the following statements about swaps is least accurate?

A)   Swaps typically have zero value at initiation.

B)   Swaps can have significant default risk.

C)   Parties to swap contracts are often individual speculators.

D)   Swaps are illiquid.

The correct answer was C)

Parties to swaps contracts are usually large institutions, rarely individual speculators or hedgers.