Globalization

Question 1

1. Which of the following statements regarding swaps is false?

A. A fixed-for-floating swap involves the exchange of interest payments with one party holding a fixed rate loan while the other holds a floating rate loan

B. In a swap, an exchange of both principal and interest is made between two counterparties

C. The payment frequency for each counterparty does not need to be the same

D. A Spread-to-Libor swap involves floating payments consisting of Libor plus or minus a fixed-rate spread.

Question 2

2. Two companies, Accuracy & Precision Engineering (APE) and Concept to Reality Design (C2RD) have agreed to enter a swap contract with notional amount of $300,000. APE, holding a fixed rate note at 11% interest, is looking to swap interest rate payments with C2RD who holds a floating rate note at LIBOR plus 4.5%. The swap contract is as follows:

APE: pay C2RD LIBOR plus 1% each period

C2RD: pay APE 9% fixed-rate interest payments

Each counterparty makes annual payments. Assuming the LIBOR rate in one year is 6%, what is the total interest payment made by each party in one year?

A. APE: $21,000 C2RD: $39,000

B. APE: $26,000 C2RD: $38,500

C. APE: $33,000 C2RD: $31,500

D. APE: $27,000 C2RD: $37,500

Explain the answers to their questions. Use at least one example for each answer. Your initial response should be between 150-200 words in length.