1.Assume that Caterpillar's return on investments is 2.50% per annum for the next four years. Next, suppose that Caterpillar and UBS (a financial institution) enter the following four year interest rate swap: Catepillar pays X% per annum fixed to UBS and receives LIBOR from UBS. All payments are made annually. Catepillar's net return after it enters the swap is (LIBOR + 0.75%) per annum. In this case, Catepillar transforms ___________ into __________ and X equals to ________.

a.Floating Rate Investment; Fixed Rate Investment;1.75%

b.Fixed Rate Investment;Floating Rate Investment;3.25%

c.Floating Rate Liability;Fixed Rate Liability; 3.25%

d.Fixed Rate Investment;Floating Rate Investment; 3.50%

e.Fixed Rate Investment; Floating Rate Investment;1.75%

2.Consider a CDS on Lehman Brothers default event. Given today's market conditions you know that the present value of expected premium payments 6.0250*s, the present value of expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1325. All measured per $1 of notional principal. You also know that Argo hedge fund bought this CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis points per year. Given this information the breakeven spread (i.e. the value of s) is _________ and today's value of the CDS contract to AIG is positive if the value of s is _______ than X.

a.222 basis points; greater

b.218 basis points; smaller

c.218 basis points; greater

d.222 basis points; smaller

e.84 basis points; greater

3.Consider a FRA where IBM agrees to borrow $100 mil. from a dealer for 6 months starting in 4 years. The contractual FRA rate is 5.5% per annum. Assume that in 4 years the actual 6-month LIBOR is 7.5% per annum. The FRA is settled when ________ pays _______ the amount of _________.

a.IBM;dealer;$1,000,000

b.dealer;IBM; $1,000,000

c.IBM;dealer; $963,855

d.dealer;IBM; $963,855

e.dealer; IBM; $36,145