How does an interest rate swap work

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Reference no: EM13897488

1. How does an interest rate swap work? In particular, what is the notional principal?

2. What is a currency swap? Describe the structure of and rationale for its cash flows.

3. What is a credit default swap? What happens in the event of default?

4. Banks quote interest rate and currency swaps using 6-month LIBOR as a basis for both transactions. How can a bank make money if it does not speculate on movements in either interest rates or exchange rates?

5. What is the AIC of a bond issue?

6. What is a comparative advantage in borrowing, and how could it arise?

7. What is basis point adjustment? Why is it not appropriate simply to add the basis point differential associated with the first currency to the quoted swap rate that the firm will pay?

8. Discuss the sense in which a 5-year currency swap is a sequence of long-term forward contracts. How do the implicit forward exchange rates in a currency swap differ from the long-term forward exchange rates for those maturities?

Reference no: EM13897488

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