An insurance company makes long-term loans with variable interest rates. It funds the loans by issuing guaranteed investment contracts (GICS) that pay a fixed rate. The interest rate paid on loans is adjusted annually. The insurance company could hed ts interest rate risk by purchasing an interest rate swap where it pays a fixed rate of interest and receives a floating rate. O True O False

An insurance company makes long-term loans with variable interest rates. It funds the loans by issuing guaranteed investment contracts (GICS) that pay a fixed rate. The interest rate paid on loans is adjusted annually. The insurance company could hed ts interest rate risk by purchasing an interest rate swap where it pays a fixed rate of interest and receives a floating rate. O True O False

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A bank finds that its assets are not matched with its liabilities. It is taking floating rate deposits and making fixed-rate loans. Come up with a numerical example that shows how the swap offsets the risk.
Bonds are a common long-term debt instrument. They are interesting because they are issued with a stated interest rate. Unlike the market interest rates, a bond's stated interest rate will never change. The stated interest rate is what will be paid to the investor over the bond's life. This means that the only way to manipulate the total amount earned or paid from bonds is by adjusting the selling price: What does it mean when a bond is issued at a premium or a discount? How does the issuance cost affect the investor's earnings from the bond purchases? How is the company's recognized interest expense affected? Reminder: Use specific examples to support your analysis.
When borrowers tend to pay back the loans to bankers earlier, the bank is facing a. Repricing risk O b. Yield curve risk O c. Basis points risk d. Embedded options risk
Asset-based lending is typically used to finance a. accounts receivable b. real estate. c. construction and development projects. d. accounts payable A credit facility is another name for: a. a branch bank. b. credit cards. c. Loans and agreements to make loans. d. wholesale banking. The prime rate is a. the base rate conventional loans b. the base rate on international loans c. none of the above d. the base rate on consumer loans The effective yield on the loan is the least when the loan is priced at a. 360-day year/actual number of days b. 365-days/actual number of days c. nominal rates/365 days d. 360-day year/30-day months Credit cards are one example of a. term loans b. open-end lines of credit c. closed-end lines of credit d. amortized payment loans
The discount rate is O the interest rate commercial banks charge each other for overnight loans. the interest rate the Federal Reserve charges member banks for loans from the Fe the interest rate consumers with good credit pay for bank loans. O the interest rate the Federal Reserve charges consumers for short term loans.
Why might a company become involved in an interestrate swap contract to receive fixed interest payments andpay variable?
I-Bonds Adjust for InflationOne of the disadvantages of bonds is that they usually offer a fixed interest rate. Once a bond isissued, its interest rate typically cannot adjust as expected inflation changes. This presents aserious risk to bond investors because if inflation rises while the nominal rate on the bondremains fixed, the real rate of return falls. The U.S. Treasury Department now offers the I-bond,which is an inflation adjusted savings bond. A Series-I bond earns interest through theapplication of a composite rate. The composite rate consists of a fixed rate that remains thesame for the life of the bond and an adjustable rate equal to the actual rate of inflation. Theadjustable rate changes twice per year and is based on movements in the Consumer PriceIndex for All Urban Consumers (CPI-U). This index tracks the prices of thousands of goods andservices, so an increase in this index indicates that inflation has occurred. As the rate of inflationmoves up and down, I-bond…
1. All of the following statements are true regarding Credit Risk, except: a. Credit Risk is the risk that the borrower may not be able to repay its obligation. b. Credit risk is included in the valuation as a factor to determine the cost of lending or financing using debt. c. Credit Risk affects the valuation of Accounts Receivable. d. All of the statements are true.2. Honesty Company paid P985,221.67 for a 90-day treasury bill with an interest rate of 6% (assume 360 days).How much should Honesty receive at maturity date?
Describe a credit default swap and its purpose. Note the rationale for the protection buyer and the protection seller and the cash flow between the two parties. Describe four key credit events that would trigger payment under a credit default swap.
Which interest rate is used on very short-term loans from one bank to another? A. Prime interest rate B. Commercial paper rate C. Treasury bill rate D. Fed funds rate
When a borrower is unable to repay its loan, it is common that the lender would negotiate with the borrower by rescheduling its payment on the loan to the future. How would the rescheduling of sovereign bonds affect the interest rate risk of the bonds?

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