Reading 44: Risk Management Applications of Swap Strategies L

position, converts, addition, following, statements

LOS c: Explain the impact to cash flow risk and market value risk when a borrower converts a fixed-rate loan to a floating rate loan.

Q1. Which of the following statements is most accurate? The duration of a long-position in a floating-rate note is:

A) close to zero and is unaffected by the addition of a receive-floating position in a swap.

B) equal to its maturity but decreases to near zero with the addition of a pay-floating position in a swap.

C) close to zero but increases with the addition of a pay-floating position in a swap.

Q2. A firm has borrowed from a bank at a cost of LIBOR + 200 basis points and wishes to create synthetic fixed-rate debt to protect against an interest rate increase. The firm should do which of the following? Pay:

A) floating (LIBOR) and receive floating (PRIME) in a swap.

B) floating (LIBOR) and receive fixed in a swap.

C) fixed and receive floating (LIBOR) in a swap.

Q3. For an issuer of a floating-rate note, the market value of the loan will be:

A) volatile, but the position will become more stable with the addition of a receive-floating swap position.

B) zero with the addition of a pay-floating swap position.

C) relatively stable but the position will become less stable with the addition of a receive-floating swap position.

Q4. Which of the following positions results in synthetic floating-rate debt?

A) A long position in a fixed-rate bond combined with a receive-fixed interest rate swap.

B) A short position in a fixed-rate bond combined with a receive-fixed interest rate swap.

C) A long position in a fixed-rate bond combined with a pay-fixed interest rate swap.

Q5. Which of the following statements regarding a firm that currently has fixed-rate, noncallable domestic debt outstanding is least accurate? The firm:

A) is exposed to an increase in interest rates.

B) can turn the debt into floating rate by entering a receive-fixed swap position.

C) can turn the debt into callable debt by entering into a receiver's swaption position.

Q6. A pay-floating counterparty in a plain-vanilla interest-rate swap also holds a long position in a fixed-rate bond. If the maturity of the bond and swap are both two years, the duration of the position will be:

A) greater than the duration of the bond alone.

B) zero.

C) less than the duration of the bond but greater than zero.