1. Which of the following statement about swaps is least accurate?
A. In a plain vanilla interest rate swap, the notional principal is swapped.
B. The default problem [i.e. default risk] is the most important limitation to the swap market.
C. In a plain vanilla interest rate swap, fixed rates are traded for variable rates.
2. A limitation of interest rate swaps is that there is a risk to each swap participant that the counterparticipant could default on his payments.
A. True
B. False
3. In order to help fund a loan request of $30 million for one year from one of its best customers, Derby Bank will borrow $15 million by selling CDs at a promised annual yield of 3.75 percent and also borrow $15 million in the Federal funds market at today’s prevailing interest rate of 3.50 percent. Credit investigation and recordkeeping costs to process this loan application were an estimated $60,000. The Credit Analysis Division recommends a minimal 1 percent risk premium on this loan and a minimal profit margin of 0.5 percent. Using the cost-plus loan pricing model, what loan rate should be charged?
A. 5.45%
B. 8.95%
C. 7.25%
D. 5.325%
E. 5.20%