Reading 71: Swap Markets and Contracts- LOSb(part 3)～ Q1

amount, payments, interest, examples, interpret

LOS b, (Part 3): Define and give examples of plain vanilla interest rate swaps and calculate and interpret the payments on an interest rate swap.

Q1. In a plain vanilla interest rate swap:

A) one party pays a floating rate and the other pays a fixed rate, both based on the notional amount.

B) payments equal to the notional principal amount are exchanged at the initiation of the swap.

C) each party pays a fixed rate of interest on a notional amount.

Q2. No Errors Printing has entered into a "plain-vanilla" interest rate swap on $1,000,000 notional principal. No Errors receives a fixed rate of 5.5% on payments that occur at quarterly intervals. Platteville Investments, a swap broker, negotiates with another firm, Perfect Bid, to take the pay-fixed side of the swap. The floating rate payment is based on LIBOR (currently at 6.0%). Because of the current interest rate environment, No Errors expects to pay a net amount at the next settlement date and has created a reserve to cover the cash outlay. At the time of the next payment (due in exactly one quarter), the reserve balance is $1,000. To fulfill its obligations under the swap, No Errors will need approximately how much additional cash?

A) No Errors will receive $250.

B) $0.

C) $250.

Q3. Consider a $10,000,000 1-year quarterly-pay swap with a fixed rate of 4.5 percent and a floating rate of 90-day London Interbank Offered Rate (LIBOR) plus 150 basis points. 90-day LIBOR is currently 3 percent and the current forward rates for the next four quarters are 3.2 percent, 3.6 percent, 3.8 percent, and 4 percent. If these rates are actually realized, at the first quarterly settlement date:

A) the fixed-rate payer will be required to make a payment of $7,500.

B) the floating rate payer will be required to make a payment of $92,500.

C) no payments will be made.

Q4. Consider a swap with a notional principal of $100 million.

Given the above diagrams, which of the following statements is TRUE? At the end of year 3:

A) A pays B $1 million.

B) A pays B $2.5 million.

C) A pays B $1.25 million.

Q5. Consider a swap with a notional principal of $300 million, annual payments, and a 30E/360 daycount convention (every month has 30 days, a year has 360 days).