Trivia Quiz On Interest Rate Swap!

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Trivia Quiz On Interest Rate Swap! - Quiz

Interest rate swaps are common in the financial market, and they help firms to limit their exposure to risk. Swaps are majorly derivative contracts, and we got to cover much about it through the past few days. The trivia quiz below is designed to test out just how much you understood about it, give it a shot and keep revising!


Questions and Answers
  • 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

    Correct Answer
    B. Swapping fixed interest rate payments for floating interest rate payments.
    Explanation
    An interest rate swap involves exchanging fixed interest rate payments for floating interest rate payments. This means that one party in the swap agrees to pay a fixed interest rate on a specified amount of money, while the other party agrees to pay a floating interest rate based on a reference rate such as LIBOR. This allows both parties to manage their interest rate exposure and potentially benefit from changes in interest rates.

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  • 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

    Correct Answer
    C. Arranged by financial institutions
    Explanation
    Interest rate swaps are financial derivatives that involve the exchange of interest payments between two counterparties. These swaps are typically arranged by financial institutions such as banks, investment firms, or other financial intermediaries. These institutions act as intermediaries, facilitating the swap transaction between the two parties. Government regulatory agencies and the World Bank do not typically arrange interest rate swaps, as their primary role is to regulate and oversee financial markets rather than directly engage in financial transactions.

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  • 3. 

    In an interest rate swap, the firm wishing to convert fixed rate obligation ( loan) to floating-rate loan.

    • A.

      Will pays fix and receive floating for the term of the swap contract

    • B.

      Will receive fix and pay floating rate for the term of the swap contract

    • C.

      Such a swap not possible

    Correct Answer
    A. Will pays fix and receive floating for the term of the swap contract
    Explanation
    In an interest rate swap, the firm wishing to convert a fixed rate obligation (loan) to a floating-rate loan will pay a fixed rate and receive a floating rate for the term of the swap contract. This means that the firm will make fixed payments based on a predetermined fixed interest rate and receive payments based on a floating interest rate that fluctuates over time. This allows the firm to hedge against changes in interest rates and potentially benefit from lower rates in the future.

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  • 4. 

    Swaps are used to protect against _____ risk, but they do not automatically protect the two parties from _____ risk.

    • A.

      Interest-rate, default

    • B.

      Default, liquidity

    • C.

      Liquidity, interest rate

    • D.

      Forecasting, principal

    Correct Answer
    A. Interest-rate, default
    Explanation
    Swaps are financial contracts that allow parties to exchange cash flows based on different variables, such as interest rates. They are commonly used to protect against interest-rate risk, as they allow parties to fix or swap their interest rate obligations. However, swaps do not automatically protect the parties from default risk, which refers to the possibility that one party may fail to fulfill their financial obligations. Default risk is a separate risk that needs to be considered and managed independently from interest-rate risk.

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  • 5. 

    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

    Correct Answer
    C. An exchange of interest payments denominated in one currency for interest payments denominated in another currency.
    Explanation
    A currency swap involves exchanging interest payments denominated in one currency for interest payments denominated in another currency. This allows the parties involved to manage their exposure to fluctuations in exchange rates and interest rates. It is not an exchange of floating-rate payments for fixed-rate payments, an exchange of one currency for another currency in the spot exchange market, or an exchange of debt covenant terms in one country for those in another country.

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