LOS a: Distinguish between the pricing and valuation of swaps.

Q1. At the inception of a market-rate plain vanilla swap, the value of the swap to the fixed-rate payer is:

A)   zero.

B)   either positive or negative.

C)   positive.

Q2. Over the life of a swap, the price of the swap:

A)   fluctuates with changes in the yield curve.

B)   does not change.

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

Q3. The price and value of a plain vanilla interest-rate swap are:

A)equal in equilibrium.

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

C)never equal.

Q4. The price of an interest rate swap is the:

A)   cost to purchase a swap.

B)   fixed rate of interest.

C)   market value of the swap.

Q5. The fixed-rate on a semiannual 2-year interest rate swap is closest to the:

A)   current 180-day T-bill rate.

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

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

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Q1. At the inception of a market-rate plain vanilla swap, the value of the swap to the fixed-rate payer is:

A)   zero.

B)   either positive or negative.

C)   positive.

Correct answer is A)

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

Q2. Over the life of a swap, the price of the swap:

A)   fluctuates with changes in the yield curve.

B)   does not change.

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

Correct answer is 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.

Q3. The price and value of a plain vanilla interest-rate swap are:

A)equal in equilibrium.

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

C)never equal.

Correct answer is C)

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.

Q4. The price of an interest rate swap is the:

A)   cost to purchase a swap.

B)   fixed rate of interest.

C)   market value of the swap.

Correct answer is B)

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 London Interbank Offered Rate (LIBOR), but does not need to be quoted.

Q5. The fixed-rate on a semiannual 2-year interest rate swap is closest to the:

A)   current 180-day T-bill rate.

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

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

Correct answer is B)

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