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XYZ company has entered into a "plain-vanilla" interest rate swap on $1,000,000 notional principal. XYZ company pays a fixed rate of 8% on payments that occur at 90-day intervals. Six payments remain with the next one due in exactly 90 days. On the other side of the swap, XYZ company receives payments based on the LIBOR rate. Describe the transaction that occurs between XYZ company and the dealer at the end of the first period if the appropriate LIBOR rate is 8.8%.

A) Dealer receives $2,000.

B) Dealer pays XYZ company $20,000.

C) XYZ company receives $2,000.

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XYZ company owes the dealer ($1,000,000)(0.08)(90/360) = $20,000. The dealer owes XYZ company ($1,000,000)(0.088)(90/360) = $22,000. Net: The dealer pays XYZ company $22,000 - $20,000 = $2,000

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XYZ, Inc. has entered into a "plain-vanilla" interest rate swap on $5,000,000 notional principal. XYZ company pays a fixed rate of 8.5% on payments that occur at 180-day intervals. Platteville Investments, a swap broker, negotiates with another firm, SSP, to take the receive-fixed side of the swap. The floating rate payment is based on LIBOR (currently at 7.2%). At the time of the next payment (due in exactly 180 days), XYZ company will:

A) pay the dealer net payments of $65,000.

B) pay the dealer net payments of $32,500.

C) receive net payments of $32,500.

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The net payment formula for the fixed-rate payer is:

Fixed Rate Payment_t = (Swap Fixed Rate ? LIBOR_t-1) × (# days in term / 360) × Notional Principal

If the result is positive, the fixed-rate payer owes a net payment and if the result is negative, then the fixed-rate payer receives a net inflow. Note:We are assuming a 360 day year.

Fixed Rate Payment = (0.085 ? 0.072) × (180 / 360) × 5,000,000 = $32,500.

Since the result is positive, XYZ owes this amount to the dealer, who will remit to SSP.

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Consider a $10,000,000 1-year quarterly-pay swap with a fixed rate of 4.5% and a floating rate of 90-day London Interbank Offered Rate (LIBOR) plus 150 basis points. 90-day LIBOR is currently 3% and the current forward rates for the next four quarters are 3.2%, 3.6%, 3.8%, and 4%. If these rates are actually realized, at the second quarterly settlement date, the fixed-rate payer in the swap will:

A) receive a payment of $5,000.

B) receive a payment of $10,000.

C) neither make nor receive a payment.

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The payment at the second settlement date will be based on 90-day LIBOR realized at the first settlement date, 3.2%. The payment (net) by the floating-rate payer will be:

(0.032 + 0.015 ? 0.045) × 90/360 × 10,000,000 = $5,000

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DWR Services, Ltd., arranges a plain vanilla interest rate swap between RWDY Enterprises (pays fixed) and RED, Inc. (receives fixed). The swap has a notional value of $25,000,000 and 270 days between payments. LIBOR is currently at 7.0%. If at the time of the next payment (due in exactly 270 days), RWDY receives net payments of $93,750, the swap fixed rate is closest to:

A) 7.500%.

B) 6.500%.

C) 6.625%.

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The net payment formula for the fixed-rate payer is:

Fixed Rate Payment_t = (Swap Fixed Rate ? LIBOR_t-1) × (# days in term / 360) × Notional Principal

If the result is positive, the fixed-rate payer owes a net payment and if the result is negative, then the fixed-rate payer receives a net inflow. Note: We are assuming a 360 day year.

We can manipulate this equation to read:

Swap Fixed Rate = LIBOR_t-1 + [(Fixed Rate Payment / ( # days in term / 360 × Notional Principal)

Note: the Fixed Rate payment will have a negative sign because we are told that RWDY receives a net payment.

= 0.07 + [(-93,750 / (270 / 360 × 25,000,000) = 0.07 ? 0.005 = 0.065, or 6.5%.

Note: We know that the Swap Fixed Rate will be less than the floating rate, or LIBOR, because RWDY receives a net payment.

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123, Inc. has entered into a "plain-vanilla" interest rate swap on $10,000,000 notional principal. 123 company receives a fixed rate of 6.5% on payments that occur at monthly intervals. Platteville Investments, a swap broker, negotiates with another firm, PPS, to take the pay-fixed side of the swap. The floating rate payment is based on LIBOR (currently at 4.8%). At the time of the next payment (due in exactly one month),123, Inc. will:

A) receive net payments of $42,500.

B) receive net payments of $14,167.

C) pay the dealer net payments of $14,167.

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The net payment formula for the floating rate payer is:

Floating Rate Payment_t = (LIBOR_t-1 ? Swap Fixed Rate) × (# days in term / 360) × Notional Principal

If the result is positive, the floating-rate payer owes a net payment and if the result is negative, then the floating-rate payer receives a net inflow. Note: We are assuming a 360 day year.

Floating Rate Payment = (0.048 ? 0.065) × (30 / 360) × 10,000,000 = -$14,167.

Since the result is negative,123 Inc. will receive this amount.

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Which of the following statements about swaps is FALSE?

A) In an interest rate swap, only the net interest payments are made.

B) In a currency swap, only net interest payments are made.

C) In an interest rate swap, the pay-fixed party makes a sequence of fixed rate interest payments and receives a sequence of floating rate interest payments.

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In a currency swap, the two parties exchange cash at the initiation, make periodic interest payments to each other during the life of the swap agreement, and exchange the principal at the termination of the swap.

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Which term does NOT apply to interest rate swaps?

A) Time to maturity.

B) Notional principal amount.

C) Trading exchange.

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Interest rate swaps are currently not traded on exchanges.

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Which of the following statements is TRUE concerning the above diagram? Counterparty:

A) A will gain in the swap when interest rates increase.

B) B pays a fixed rate to counterparty A.

C) B will gain in the swap when interest rates increase.

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From the diagram, counterparty A pays fixed to and receives variable from counterparty B. As interest rates rise, counterparty B owes counterparty A higher variable payments.

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> >	Fixed> >	> >
Counterparty> >	???????????> >	Counterparty
A	???????????	B
	Variable

Which of the following statements is most accurate concerning the above diagram?

A) Counterparty A will gain in the swap when interest rates increase.

B) Counterparty B will gain in the swap when interest rates increase.

C) Counterparty B pays a fixed rate to counterparty A.

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From the diagram, counterparty A pays fixed to and receives variable from counterparty B. As interest rates rise, counterparty B owes counterparty A higher variable payments, while A’s obligations are fixed.

honeycfa

Which of the following statements regarding a plain vanilla swap is FALSE?

A) Only a net payment is made on each settlement date.

B) The notional principal amounts are exchanged at contract initiation and at the termination of the swap.

C) If interest rates decrease, the swap has a negative value to the fixed rate payer.

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There is no exchange of the principal amount at the initiation or termination of a plain vanilla swap.