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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. ffice ffice" />
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.
Correct answer is C)
A floating-rate note’s value will be relatively stable because the payments vary with changes in the interest rates. For the long position (the lender), adding a pay-floating position will produce a synthetic fixed-rate position whose value will change with changes in interest rates.
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.
Correct answer is C)
To create synthetic fixed-rate debt to protect against an interest rate increase, the firm should pay fixed and receive variable 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.
Correct answer is C)
A floating-rate note’s value will be relatively stable because the payments vary with changes in the interest rates. Adding a receive-floating position will produce a synthetic fixed-payment position whose value will change with changes in interest rates.
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.
Correct answer is B)
The receive-fixed part of the interest rate swap offsets the fixed rate payments the short bond position requires. Therefore, a synthetic floating-rate debt position is created.
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.
Correct answer is A)
Since the debt is currently fixed rate, there is no interest rate exposure for the firm.
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.
Correct answer is A)
The duration of the position will increase with the addition of the pay-floating/receive-fixed position. Both remaining answers can be correct.
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发表于 2009-4-10 11:07
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