1.Which of the following is least likely to have led to the increased use of the swap market to hedge interest rate risk?

A)   Leveraged credit buyers.

B)   Interstate banking.

C)   Mortgage-backed securities.

D)   Duration mismatch.

2.There has been an increasing trend to measuring corporate credit spreads relative to which of the following security classes?

A)   Treasury securities.

B)   Mortgage-backed securities.

C)   Options.

D)   Swaps.

3.Which of the following is least likely to be associated with the movement toward the use of corporate credit spreads based on swaps versus Treasuries?

A)   Financial institutions’ desire to offset floating-rate liabilities with floating rate receipts.

B)   Financial institutions’ desire to offset fixed-rate payments with fixed-rate receipts.

C)   The dominance of credit markets by levered credit purchasers.

D)   The need for financial institutions to fund short-term deposits with long-term and intermediate term credits.

1.Which of the following is least likely to have led to the increased use of the swap market to hedge interest rate risk?

A)   Leveraged credit buyers.

B)   Interstate banking.

C)   Mortgage-backed securities.

D)   Duration mismatch.

The correct answer was B)

The size and extensive use of the swap market is largely attributed to the dominance of commercial banks and other leveraged credit purchasers in the MBS and high grade corporate debt market. Thrifts and other financial institutions also use swaps extensively to manage duration mismatch resulting from funding fixed-rate assets with variable rate deposits.

2.There has been an increasing trend to measuring corporate credit spreads relative to which of the following security classes?

A)   Treasury securities.

B)   Mortgage-backed securities.

C)   Options.

D)   Swaps.

The correct answer was D)

Due to the size and extensive use of the swap market there has been a shift from corporate credit spreads based on Treasuries to credit spreads linked to swaps.

3.Which of the following is least likely to be associated with the movement toward the use of corporate credit spreads based on swaps versus Treasuries?

A)   Financial institutions’ desire to offset floating-rate liabilities with floating rate receipts.

B)   Financial institutions’ desire to offset fixed-rate payments with fixed-rate receipts.

C)   The dominance of credit markets by levered credit purchasers.

D)   The need for financial institutions to fund short-term deposits with long-term and intermediate term credits.

The correct answer was D)

Financial institutions are no longer dependent on the earnings from their long-term assets to pay for their deposits.