Chapter 14 Prep Questions

1) In interest rate swaps, two counterparties make a contractual agreement to exchange cash flows at periodic intervals. T or F.

2) In a fixed-for floating interest rate swap, one counterparty exchanges the interest payments on a----------------------rate debt obligation for the---------------------rate interest payments of the other counterparty.

3) In a currency swap, one counterparty exchanges the debt service obligations of a bond denominated in----------------------currency for the debt service obligations of the other counterparty denominated in-----------------------------currency.

4) A swap bank is a generic term to describe a financial institution that------------------------------swaps between counterparties.

5) A quality spread differential (QSD) is the difference between the default risk premium differential on------------------rate debt and the default risk premium differential on-----------------------rate debt.

6) Given a QSD, it is possible for each counterparty to a swap transaction:

a. to issue the debt alternative that is least advantageous to it given its financing needs

b. to swap interest payments

c. to end up with the type of interest payment desired at a lower all-in cost

d. all of the above

7) With a swap transaction, both principal and the last year's interest payment are repaid by the borrower at maturity. T or F.

8) With a swap transaction;

a. only interest rates are exchanged

b. only interest payments are exchanged

c. each counterparty repays a different principle amount

d. each counterparty repays the principle borrowed on a different date

9) Swap banks buy interest payments at the ask price and sell interest payments at the bid price. T or F.

10) Credit risk faced by swap banks refers to the probability that a counterparty to a swap transaction will---------------------------.