One reason interest rate swaps exist is that:    interest rates are lower because it is easy to fool investors about the credit worthiness of a company with interest rate swaps. industrial companies are not permitted to issue fixed-rate debt. commercial banks are not permitted to issue floating-rate debt. interest rate swaps allow interest rate risk to be separated from credit risk.

Q: Which of the following statements is incorrect? a. when market rates are changing, the discount rate…

A: b. money market interest rates tend to respond quickly to Federal Reserve open market operations:…

Q: Which innovation has caused the most trouble for financial institutions that issue residential…

A: Answer: The correct answer is option A. Securitization.

Q: Compare and contrast the percent of sales and analysis of receivables method for determining bad…

A: Bad debt is categorized as an expense, which emerges when an account receivable no longer remains as…

Q: The Federal Reserve has the power to fix the min rate of interest that commercial banks may pay on…

A: Federal interest rate-Federal Reserve pays interest on bank's reserve balance, and it is a common…

Q: Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a…

A: Corporate Bond: Bonds issued by companies, whether they be public or private, are considered to be…

Q: Which one of the following statements regarding the loans market is false? a) The principal-agent…

A: Please see the next step for the Answer

Q: The obvious benefit of holding a diversified portfolio of loans is to reduce the impact of single…

A: Yes, there are benefits of holding a non-diversified portfolio of loans as well for a bank.

Q: How do corporate borrowers use interest rate or cross-currency swaps to reduce reduce the costs of…

A: Optimum Capital Structure Occasionally, some financial restructuring is required by a company to…

Q: Considering the Market for Loanable Funds, explain what the following statement means: “Bonds…

A: The statement refers to the decision-making process for issuing bonds in the context of the market…

Q: rates rise, bor

A: The correct option is shown as,

Q: Companies often use derivatives to reduce the risk of adverse changes in all of the following…

A: Risk Management -Risk management includes identifying, analyzing, and responding to various risk…

Q: The company's bank won't lend it any more money than it already has, and investment bankers have…

A: A covenant or Indenture is a type of undertaking accepted by an issuer to restrain from doing…

Q: When the Fed p

A: Treasury bonds are the benchmark for credit spreads. Reduce the value of corporate bonds by widening…

Q: Which of the following is NOT true?       swaps (CDS) and collateralized debt obligations…

A: Usually, the rates of any reserves for the banks and financial institutions are fixed for every bank…

Q: Banks can hedge the credit risk of their mortgage loans by buying credit default swaps. (Think about…

A: The risk or uncertainty that is present in an investment transaction that the investee will not…

Q: Which of the following statements is false? A.   The sovereign credit rating is a risk of a…

A: A bond is an fixed market instrument that carries less risk than equity.  To check creditworthiness…

Q: hort-term interest rates are more volatile than long-term interest rates. Despite this, rates of…

A: Reconciliation of the following views by taking: Observation 1: Short-term interest rates are…

Q: What is MOST TRUE of DEFAULT RISK on a mortgage loan? It is always lower with lower interest rates.…

A: Default risk is the risk that a lender assumes when a borrower fails to make mandatory debt…

Q: (a) “Both banks and the bond market complete maturity transformation although they accomplish the…

A: Answer

Q: Credit risk is a factor for commercial mortgage-backed securities because they are backed by…

A: Option A. Non Recourse Commercial Mortgage backed securities are securities whose payoff depends on…

Q: When estimating cost of debt, the firm should not simply use current short-term rates because these…

A: When estimating the cost of debt, firms typically should not simply use current short-term rates…

Q: When the total cost of borrowing is less than the bond interest paid, Select answer from the options…

A: A bond may be issued at face value, at a discount, or at a premium. The bond is issued at face value…

Q: What is MOST TRUE of DEFAULT RISK on a mortgage loan? Group of answer choices It is always lower…

A: Mortgage loans are secured loan i.e., borrower raise funds for various purposes by promising…

Q: Due to a lack of information, a trader is not able to retrieve the yield of government bonds as the…

A: The call option price or the value of call option is affected by various factors such as strike…

Q: 7- which of the statements given below is true? Please select one; a) every financial market allows…

A: Financial market refers to the place where short-term and long-term securities are traded. It can be…

Q: How did mark-to-market (MTM) accounting factor into the credit crisis?     CDS's were undervalued…

A: Credit crisis arises when borrowers are unable to pay the huge amount and its effects on the overall…

Q: Interest rates charged by pawnshops, title loan companies, and payday loan companies often far…

A: Loan or credit cards are used to avail credit. The individuals are required to pay interest for…

Q: Only (b) and (c) are true.

A: Mark to market rule refers to the method in which fair values in the account which relate to the…

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.