Hull: Fundamentals of Futures and Options Markets, Eighth Edition
Chapter 7: Swaps
Multiple Choice Test Bank: Questions without Answers (81-100)
1. A company can invest funds for five years at LIBOR minus 30 basis points. The five-year swap
rate is 3%. What fixed rate of interest can the company earn by using the swap?
A.2.4%
B.2.7%
C.3.0%
D.3.3%
2. Which of the following is true?
A.Principals are not usually exchanged in a currency swap
B.The principal amounts usually flow in the opposite direction to interest payments at the
beginning of a currency swap and in the same direction as interest payments at the end of the
swap.
C.The principal amounts usually flow in the same direction as interest payments at the beginning
of a currency swap and in the opposite direction to interest payments at the end of the swap.
D.Principals are not usually specified in a currency swap
3. Company X and Company Y have been offered the following rates
Fixed Rate Floating Rate
Company X3.5% 3-month LIBOR plus 10bp
Company Y4.5% 3-month LIBOR plus 30 bp
Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a
swap with each other where the apparent benefits are shared equally, what is company X’s
effective borrowing rate?
A.3-month LIBOR−30bp
, B.3.1%
C.3-month LIBOR−10bp
D.3.3%
The interest rate differential between the fixed rates is 100 basis points. The interest rate
differential between the floating rates is 20 basis points. The difference between the interest
rates differentials is 100 – 20 = 80 basis points. This is the total apparent gain from the swap to
the two sides. Since the benefits are shared equally company X should be able to borrow at 40
bp less than it is currently offered in the floating rate market, i.e., at LIBOR minus 30 bp
4. Which of the following describes the five-year swap rate?
A.The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR
on a 5-year swap
B.The fixed rate of interest which a swap market maker is prepared to receive in exchange for
LIBOR on a 5-year swap
C.The average of A and B
D.The higher of A and B
5. Which of the following is a use of a currency swap?
A.To exchange an investment in one currency for an investment in another currency
B.To exchange borrowing in one currency for borrowings in another currency
C.To take advantage situations where the tax rates in two countries are different
D.All of the above
6. Which of the following is true
A.OIS rates are less than the corresponding LIBOR rates
B.OIS rates are greater than corresponding LIBOR rates
C.OIS rates are sometimes greater and sometimes less than LIBOR rates
D.OIS rates are equivalent to one-day LIBOR rates
7. Which of the following describes an interest rate swap?
Chapter 7: Swaps
Multiple Choice Test Bank: Questions without Answers (81-100)
1. A company can invest funds for five years at LIBOR minus 30 basis points. The five-year swap
rate is 3%. What fixed rate of interest can the company earn by using the swap?
A.2.4%
B.2.7%
C.3.0%
D.3.3%
2. Which of the following is true?
A.Principals are not usually exchanged in a currency swap
B.The principal amounts usually flow in the opposite direction to interest payments at the
beginning of a currency swap and in the same direction as interest payments at the end of the
swap.
C.The principal amounts usually flow in the same direction as interest payments at the beginning
of a currency swap and in the opposite direction to interest payments at the end of the swap.
D.Principals are not usually specified in a currency swap
3. Company X and Company Y have been offered the following rates
Fixed Rate Floating Rate
Company X3.5% 3-month LIBOR plus 10bp
Company Y4.5% 3-month LIBOR plus 30 bp
Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a
swap with each other where the apparent benefits are shared equally, what is company X’s
effective borrowing rate?
A.3-month LIBOR−30bp
, B.3.1%
C.3-month LIBOR−10bp
D.3.3%
The interest rate differential between the fixed rates is 100 basis points. The interest rate
differential between the floating rates is 20 basis points. The difference between the interest
rates differentials is 100 – 20 = 80 basis points. This is the total apparent gain from the swap to
the two sides. Since the benefits are shared equally company X should be able to borrow at 40
bp less than it is currently offered in the floating rate market, i.e., at LIBOR minus 30 bp
4. Which of the following describes the five-year swap rate?
A.The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR
on a 5-year swap
B.The fixed rate of interest which a swap market maker is prepared to receive in exchange for
LIBOR on a 5-year swap
C.The average of A and B
D.The higher of A and B
5. Which of the following is a use of a currency swap?
A.To exchange an investment in one currency for an investment in another currency
B.To exchange borrowing in one currency for borrowings in another currency
C.To take advantage situations where the tax rates in two countries are different
D.All of the above
6. Which of the following is true
A.OIS rates are less than the corresponding LIBOR rates
B.OIS rates are greater than corresponding LIBOR rates
C.OIS rates are sometimes greater and sometimes less than LIBOR rates
D.OIS rates are equivalent to one-day LIBOR rates
7. Which of the following describes an interest rate swap?
