optiix

If the U.S. discount rate is 2.5% and the London Interbank Offered Rate (LIBOR) is +7.5%, the add-on interest that must be paid on a 60-day, $250 million loan is closest to:

A) $3.13 million.

B) $4.17 million.

C) $3.08 million.

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Add-on interest = LIBOR × (60/360) × $250 million
Interest = 7.5% × (1/6) × $250 million = $3.125 million

optiix

Euribor is:

A) the same as EuroLIBOR.

B) the rate on U.S. dollar deposits in continental Europe.

C) published by the European Central Bank.

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Euribor is the interbank lending rate for Euro denominated loans, published by the European Central Bank, and compiled in Frankfurt.

optiix

If 60-day London Interbank Offered Rate (LIBOR) is 6 percent, the interest on a 60-day LIBOR-based Eurodollar deposit of $990,000 is:

A) $10,000.

B) $9,900.

C) $59,400.

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0.06 × (60/360) × 990,000 = $9,900.

optiix

The offer rate on U.S. dollar (USD) denominated loans between large banks in London is called:

A) London Interbank Offered Rate (LIBOR).

B) Eurobor.

C) the Exchequer rate.

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The rate on USD denominated loans between large banks in London is the LIBOR.

optiix

Which of the following statements regarding Eurodollar time deposits is NOT correct?

A) USD denominated deposits in large banks in Tokyo are Eurodollar accounts.

B) Euro denominated deposits at large banks in the U.S. are Eurodollar accounts.

C) U.S. dollar (USD) denominated deposits at large banks in London are Eurodollar accounts.

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Eurodollar deposits are USD denominated deposits in large banks held outside the United States. By convention, the rates are quoted as an add-on yield. Following this convention, euro-denominated deposits held outside of the euro-block countries would be “Euroeuro” deposits.

optiix

Eurodollar time deposits are:

A) denominated in U.S. dollars (USD).

B) priced at a discount.

C) actively traded in the secondary market.

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Eurodollar time deposits are USD denominated deposits with large banks outside the U.S. They are usually short term and not traded in a secondary market.

optiix

Which of the following statements regarding Eurodollar time deposits is NOT correct?

A) Sometimes the best rates are available in New York City.

B) Rates are quoted as an add-on yield.

C) They are available in Switzerland.

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Eurodollar time deposits are U.S. dollar denominated deposits outside the United States. Rates are quoted as an annualized add-on yield, based on a 360-day year.

optiix

A forward rate agreement (FRA):

A) can sometimes be viewed as the right to borrow money at below-market rates.

B) requires the long to pay cash to the short if the rate specified in the contract at expiration is below the current floating rate.

C) generally uses a fixed reference interest rate.

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If the floating rate is above the rate specified in the agreement, the long position can be viewed as the right to borrow at below-market rates. Floating rates like LIBOR are used in FRAs. The long must pay the short only if the contracted rate at the expiration date is above the floating rate.

optiix

An FRA is:

A) a Forward Rate Agreement.

B) the Futures Regulatory Administration.

C) a Forward Riskfree Asset.

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An FRA is a forward rate agreement.

optiix

A forward rate agreement (FRA):

A) can be used to hedge the interest rate exposure of a floating-rate loan.

B) is settled by making a loan at the contract rate.

C) is risk-free when based on the Treasury bill rate.

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An FRA settles in cash and carries both default risk and interest rate risk, even when based on an essentially risk-free rate. It can be used to hedge the risk/uncertainty about a future payment on a floating rate loan.