Reading 65: LOS a ～ Q1- 5 class, interest, black

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1.The fixed-rate on a semiannual 2-year interest rate swap is closest to the:

A)   current 180-day T-bill rate.

B)   current yield on a par value 2-year Treasury bond.

C)   coupon rate on a 2-year par bond with the same credit risk as the fixed-rate payer.

D)   coupon rate on a 2-year par bond with the same credit risk as the reference rate.

2.The price of an interest rate swap is the:

A)   fixed rate of interest.

B)   cost to purchase a swap.

C)   market value of the swap.

D)   price to get out of a swap contract.

3.The price and value of a plain vanilla interest-rate swap are:

A)   equal in equilibrium.

B)   never equal.

C)   only equal at the inception of a swap contract.

D)   both different for the payer and the receiver position in the swap.

4.Over the life of a swap, the price of the swap:

A)   increases towards the future price.

B)   does not change.

C)   fluctuates with changes in the yield curve.

D)   is approximately equal to the market value of the swap.

5.At the inception of a market-rate plain vanilla swap, the value of the swap to the fixed-rate payer is:

A)   zero.

B)   positive.

C)   negative.

D)   either positive or negative.

spaceedu

1.The fixed-rate on a semiannual 2-year interest rate swap is closest to the:

A)   current 180-day T-bill rate.

B)   current yield on a par value 2-year Treasury bond.

C)   coupon rate on a 2-year par bond with the same credit risk as the fixed-rate payer.

D)   coupon rate on a 2-year par bond with the same credit risk as the reference rate.

The correct answer was D)

The fixed-rate on a swap is calculated using the yield curve for the floating rate reference, usually LIBOR. Therefore, the fixed rate reflects the credit spread of that rate over the riskless rate of return.

2.The price of an interest rate swap is the:

A)   fixed rate of interest.

B)   cost to purchase a swap.

C)   market value of the swap.

D)   price to get out of a swap contract.

The correct answer was A)

The price of an interest rate swap is quoted as the rate on the fixed-rate payments. The floating rate is a known reference rate, such as LIBOR, but does not need to be quoted.

3.The price and value of a plain vanilla interest-rate swap are:

A)   equal in equilibrium.

B)   never equal.

C)   only equal at the inception of a swap contract.

D)   both different for the payer and the receiver position in the swap.

The correct answer was B)

The price of a swap is the fixed rate specified in the swap and is the same for the payer and the receiver. The value is the dollar value of the contract to the fixed-rate payer and is the opposite of the value to the floating-rate payer.

4.Over the life of a swap, the price of the swap:

A)   increases towards the future price.

B)   does not change.

C)   fluctuates with changes in the yield curve.

D)   is approximately equal to the market value of the swap.

The correct answer was B)

The price of a swap, quoted as the fixed rate in the swap, is determined at contract initiation and remains fixed for the life of the swap.

5.At the inception of a market-rate plain vanilla swap, the value of the swap to the fixed-rate payer is:

A)   zero.

B)   positive.

C)   negative.

D)   either positive or negative.

The correct answer was A)

A market-rate swap is priced so that the value to either side is zero at the inception of the swap.