1. Which of the following statement about swaps is least accurate?

A. In a plain vanilla interest rate swap, the notional principal is swapped.

B. The default problem [i.e. default risk] is the most important limitation to the swap market.

C. In a plain vanilla interest rate swap, fixed rates are traded for variable rates.

2. A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparticipant could default on his payments.

A. True

B. False

3. In order to help fund a loan request of $30 million for one year from one of its best customers, Derby Bank will borrow $15 million by selling CDs at a promised annual yield of 3.75 percent and also borrow $15 million in the Federal funds market at today’s prevailing interest rate of 3.50 percent. Credit investigation and recordkeeping costs to process this loan application were an estimated $60,000. The Credit Analysis Division recommends a minimal 1 percent risk premium on this loan and a minimal profit margin of 0.5 percent. Using the cost-plus loan pricing model, what loan rate should be charged?

A. 5.45%

B. 8.95%

C. 7.25%

D. 5.325%

E. 5.20%