Reading 65: LOS j ～ Q 1- 4 style, black, depends, 2008

spaceedu

1.A swap spread depends primarily on the:

A)   shape of the reference rate yield curve.

B)   credit of the parties involved in the swap.

C)   maturity of the swap.

D)   general level of credit risk in the overall economy.

2.The swap spread will increase with:

A)   a deterioration in one party’s credit.

B)   the tenor of the swap.

C)   the variability of interest rates.

D)   an increase in the credit spread embedded in the reference

3.A swap spread is the difference between:

A)   the fixed-rate and floating-rate payment rates at the inception of the swap.

B)   the 90-day T-bill rate and the first floating rate payment on a swap.

C)   LIBOR and the fixed rate on the swap.

D)   the fixed rate on an interest rate swap and the rate on a Treasury bond of maturity equal to that of the swap.

4.For an interest rate swap, the swap spread is the difference between the:

A)   fixed rate and the floating rate in a given period.

B)   swap rate and the geometric mean of the relevant forward rates.

C)   average fixed rate and the average floating rate over the life of the contract.

D)   swap rate and the corresponding Treasury rate.

 

spaceedu

1.A swap spread depends primarily on the:

A)   shape of the reference rate yield curve.

B)   credit of the parties involved in the swap.

C)   maturity of the swap.

D)   general level of credit risk in the overall economy.

The correct answer was D)     

The swap spread depends primarily on the general level of credit risk in the overall economy.

2.The swap spread will increase with:

A)   a deterioration in one party’s credit.

B)   the tenor of the swap.

C)   the variability of interest rates.

D)   an increase in the credit spread embedded in the reference

The correct answer was D)

The swap spread is the spread between the fixed-rate on a market-rate swap and the Treasury rate on a similar maturity note/bond. Since the fixed rate is calculated from the reference rate yield curve, it is increased as the credit spread embedded in the reference rate yield curve increases.

3.A swap spread is the difference between:

A)   the fixed-rate and floating-rate payment rates at the inception of the swap.

B)   the 90-day T-bill rate and the first floating rate payment on a swap.

C)   LIBOR and the fixed rate on the swap.

D)   the fixed rate on an interest rate swap and the rate on a Treasury bond of maturity equal to that of the swap.

The correct answer was D)

A swap spread is the difference between the fixed rate on an interest rate swap and a Treasury bond of maturity equal to that of the swap.

4.For an interest rate swap, the swap spread is the difference between the:

A)   fixed rate and the floating rate in a given period.

B)   swap rate and the geometric mean of the relevant forward rates.

C)   average fixed rate and the average floating rate over the life of the contract.

D)   swap rate and the corresponding Treasury rate.

The correct answer was D)

The swap spread is the swap rate minus the corresponding Treasury rate.