1.An interest rate swap usually involves:

(a)swapping debt maturities.

(b)swapping fixed interest rate payments for floating interest rate payments.

(c)swapping interest rate tax liabilities.

(d)swapping debt principal payments.

2.Usually, interest rate swaps are:

(a)done directly between the two counterparties.

(b)arranged by government regulatory agencies.

(c)arranged by financial institutions.

(d)arranged by the World Bank.

3.In an interest rate swap, the firm wishing floating-rate debt:

(a)issues fixed rate and is obligated to make fixed-rate payments to its bondholders only if floating-rate payments are received from the other counterparty.

(b)issues fixed-rate debt and is obligated to make fixed-rate payments to its bondholders regardless of whether it receives floating-rate payments from the other counterparty.

(c)issues floating-rate debt and is obligated to make fixed-rate payments to its bondholders regardless of whether it receives floating-rate payments from the other counterparty.

(d)issues floating-rate debt.

4.In an interest rate swap:

(a)there is no credit risk associated with receiving the promised interest rate payments.

(b)the swap dealer faces no credit risk; only the counterparties are exposed.

(c)counterparty credit risk has been assumed by the swap dealer.

(d)the swap dealer assumes the risk of each counterparty defaulting on its respective principal payments.

5.An interest rate swap is:

(a)a loan from a commercial bank.

(b)a financial transaction where two borrowers exchange interest payments on their respective debts.

(c)an exchange of dividend payments.

(d)a swap of the debt covenant terms.

6.Swaptions are:

(a)options on futures.

(b)options on forwards.

(c)swaps of options.

(d)options on swaps.

7.One reason interest rate swaps exist is that:

(a)interest rates are lower because it is easy to fool investors about the credit worthiness of a company with interest rate swaps.

(b)industrial companies are not permitted to issue fixed-rate debt.

(c)commercial banks are not permitted to issue floating-rate debt.

(d)interest rate swaps allow interest rate risk to be separated from credit risk.

8.A currency swap is:

(a)an exchange of floating-rate payments for fixed-rate payments.

(b)an exchange of one currency for another currency in the spot exchange market.

(c)an exchange of interest payments denominated in one currency for interest payments denominated in another currency.

(d)an exchange of debt covenant terms in one country for those in another country.

9.Circus swaps are:

(a)basis swaps.

(b)puttable swaps.

(c)cap swaps.

(d)combined interest rate and currency swaps.

10.In efficient markets, the value of an outstanding interest rate swap:

(a)should always be zero.

(b)will change as interest rates change.

(c)will never change.

(d)will change only if the credit standing of one of the counterparties changes.