A Swap Is a Method Used to Reduce Financial Risk

question 9

Multiple Choice

A swap is a method used to reduce financial risk.Which of the following statements about swaps, if any, is NOT CORRECT?

• A) The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
• B) Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
• C) A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
• D) A company can swap fixed interest payments for floating interest payments.
• E) A swap involves the exchange of cash payment obligations.

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Definitions:

Net Profit Margin Ratio

A financial metric that shows the percentage of net income to sales revenue, indicating how much profit each dollar of sales generates.

Total Asset Turnover Ratio

An economic indicator that evaluates how effectively a business utilizes its assets to produce sales income.

Return on Assets Ratio

A financial metric indicating how profitable a company is relative to its total assets, calculated by dividing net income by total assets.

Accruing Interest Expense

The process of recording interest expense that has been incurred but not yet paid in the financial statements.