Series 50: Exercise

Exercise

Choose the best answer

1. 1. The city of Farmington issues variable-rate securities. It also enters into a swap agreement with Best State Bank. Farmington agrees to pay a 7% fixed interest rate to Best State Bank, while in return Best State Bank agrees to pay LIBOR + 2% to Farmington. Which of the following are true?
2. I. Farmington has entered a floating-to-fixed rate swap.
3. II. Farmington has entered a fixed-to-floating rate swap.
4. III. Best State Bank is the receiver of a fixed-rate swap.
5. IV. Best State Bank is the receiver of a floating rate swap.
6. A. I and III
7. B. I and IV
8. C. II and IV
9. D. II and III
10. 2. In which kind of swaption can the holder enter the swap only on the expiration date?
11. A. American swaption
12. B. Bermudan swaption
13. C. Eastern swaption
14. D. European swaption
15. 3. Bonneville decides to engage in a fixed-rate swap on $20,000,000 of variable-rate GO bonds. Bonneville contacts a swap dealer and the two parties enter into a swap agreement that is advanced set, settled in arrears. Payments will be paid every six months. The fixed rate is 5.4% and the variable rate is LIBOR + 2%. At the start of the settlement period LIBOR is 3% and at the end of the period LIBOR has fallen to 2.0%. Assume that each month has 30 days and each year has 360 days. Which of the following are true?
16. A. Bonneville will pay the swap dealer $40,000.
17. B. The swap dealer will pay Bonneville $40,000.
18. C. The swap dealer will pay Bonneville $140,000.
19. D. Bonneville will pay the swap dealer $140,000.
20. 4. Bonneville decides to engage in a fixed-rate swap on $20,000,000 of 10-year variable-rate GO bonds that it has issued. Bonneville contacts a swap dealer and the two parties enter into a fixed-rate swap agreement that is advanced set, settled in arrears. Payments will be paid every six months. The fixed rate is 5.4% and