In a vanilla interest rate swap:

Question

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The question asks about the structure of a vanilla interest rate swap, so we should compare the given statements to the standard definition.
Option 1: 'one party pays another party an amount calculated according to a floating interest rate on a notional principal, in exchange for an amount calculated on the basis of a fixed interest rate.' This precisely describes a typical vanilla interest rate swap: there is no exchange of notional principal, only the net interest payments—one leg floating, the other fixed. This option aligns with the conventional understanding of a plain-vanilla swap.
Option 2: 'the amounts payable between parties depends on a specified principal that is exchanged at the beginning and at the end.' In a vanilla interest rate swap, there is no actual exchange of notional principal during the life of the swap (no principal exchange at inception or maturity). The notional serves only as a reference to calculate interest payments, not as an amount exchanged, so this statement is incorrect.
Option 3: 'only interest flows are exchanged until maturity, when the principal is exchanged according to the difference in the interest rates over the lifetime of the swap.' This mixes up the typical mechanics: in a vanilla swap, there is no principal exchange at maturity or at any time. The cash flows are net interest payments on the notional, with no final principal exchange. The reference to exchanging principal at maturity makes this option false.
Option 4: 'the amounts payable between parties depend on a specified principal that is exchanged at the outset.' Again, the key issue is the existence of principal exchange. In a standard vanilla interest rate swap, there is no upfront principal exchange; the payments are based on the notional but the notional itself is not exchanged. Therefore this statement is not accurate for a vanilla swap.

25741 Capital Markets - Autumn 2025 Quiz 7 - GRADED

In a vanilla interest rate swap:

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GHI Industries has issued $180 million worth of long-term bonds at a fixed rate of 14%. GHI Industries then enters into an interest rate swap where it will pay LIBOR and receive a fixed 6% on a notional principal of $180 million. After all these transactions are considered, GHI's cost of funds is:

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25741 Capital Markets - Autumn 2025 Quiz 7 - GRADED

In a vanilla interest rate swap:

View Explanation

Log in for full answers

Similar Questions

GHI Industries has issued $180 million worth of long-term bonds at a fixed rate of 14%. GHI Industries then enters into an interest rate swap where it will pay LIBOR and receive a fixed 6% on a notional principal of $180 million. After all these transactions are considered, GHI's cost of funds is:

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

Part 1Interest rate swaps have an advantage over options and futures in​ that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.

AIG Co. expects interest rates to rise over the next 12 months. To hedge its floating-rate loan, the company should:

An interest rate swap involves:

Lockheed wants 5-year floating rate debt in USD. 5-year IRS = 4%. SOFR = 4.15%. It could issue 5-year fixed rate at 4.5% or 5-year FRNs at SOFR + 1%. What should it do?

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Part 1Interest rate swaps have an advantage over options and futures in that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.