hinsafdar

Which of the following statements involving a plain vanilla interest rate swap is least accurate? In a plain interest rate swap, the:

A) counterparty who receives the fixed payment by agreeing to pay variable rate interest is called the receive-fixed side of the swap.

B) parties generally agree to swap the notional principal.

C) parties involved in the swap agreement are called counterparties.

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The notional principal is the dollar amount specified in the swap agreement. The counterparties use the notional principal to determine the amount of the interest payments. They generally do not exchange the notional principal.

hinsafdar

Which transaction would least likely be classified as an interest rate swap?

A) Receive AUD fixed, pay NZD floating.

B) Receive U.S. fixed, pay U.S. commercial paper.

C) Pay USD fixed, receive U.S. LIBOR.

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Because it involves two different currencies, this would be a currency swap.

hinsafdar

Which of the following statements about a currency swap is least accurate?

A) The periodic interest payments are exchanged in full each period.

B) Most currency swaps are done to exploit market inefficiencies.

C) Notional principal is exchanged at the termination of the swap.

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Unlike interest rate swaps, notional principal is swapped at both the initiation and the termination of the swap. Full interest payments are exchanged at each settlement date. Exploiting market inefficiencies was once a motivation for currency swaps, but it is not today (because the market is efficient). Today motivations range from reducing transactions costs to maintaining privacy to avoiding regulation.

hinsafdar

Which of the following statements about notional principal in plain vanilla interest rate swaps is least accurate? Notional principal:

A) is not exchanged by the counterparties.

B) is used to calculate the fixed rate interest payment; the swap's market value is used to calculate the floating rate payment.

C) does not vary during the swap tenor.

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The notional amount is used to calculate both the fixed and the floating rate payment streams. Both of the other choices are true.