1. Which statement is FALSE about interest rate swaps. Select one: a. The counte

Question

1. Which statement is FALSE about interest rate swaps.

Select one:

a. The counterparty who agrees to pay the swap rate is called the payer. The counterparty who agrees to pay the variable rate, and thus receive the swap rate, is called the receiver.

b. An interest rate swap will specify dates during the swap term when the exchange of payments is to occur.

c. At the conclusion (maturity) of the swap, nominals are also swapped.

d. At the time that each exchange of payments is to occur, the two payments are netted and only one payment is made. This is known as the net swap payment.

2. Which is NOT a reason to use swaps to manage a bank's duration gap?

Select one:

a. Many institutions such as federal agencies are restricted or disallowed to trade in futures.

b. Swap costs are low.

c. Swaps can be tailored to meet specific needs.

d. Swaps are liquid and and easily be reversed.

Explanation / Answer

Question 1). Answer :- Option c). At the conclusion (maturity) of the swap, nominals are also swapped

Explanation :- In an interest rate swap, no exchange of principal (nominals) takes place but only interest payments are made on the notional principal amount. Interest payments can be exchanged between two parties to achieve changes in the calculation of interest on the principal, for example :-

i). Floating to fixed;

ii). Fixed to floating;

iii). LIBOR to prime-based.

iv). Prime to LIBOR; (LIBOR refers to London inter bank offered rate).

v). Currency one to currency another.

Accordingly, The statement mentioned in option (c) to the given question "At the conclusion (maturity) of the swap, nominals are also swapped" is false (incorrect) regarding the interest rate swap.

Question 2). Answer :- Option d). Swaps are liquid and and easily be reversed.

Explanation :- The statements mentioned in options a, b and c are reasons for using swaps to manage the duration gap of bank. However, The statement mentioned in option (d) to the given question "Swaps are liquid and and easily be reversed" is not any reason for using swaps to manage the duration gap of bank.

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