Which of the Following Best Describes a Total Return Swap

question 3

Multiple Choice

Which of the following best describes a total return swap?

• A) It exchanges the realized return on an asset, including both income and capital gains/losses, for a return, equal to LIBOR plus a spread on the initial value of the asset
• B) It exchanges the promised return on an asset, including both income and capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
• C) It exchanges the realized return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
• D) It exchanges the promised return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset

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Definitions:

Insurance Contract

A legally binding agreement between an insurer and the insured, outlining coverage terms, conditions, and premiums.

Insurable Interest

The requirement that a policyholder must stand to lose financially if the insured event occurs, establishing a legal right to insure the item or life.

Insurance Company

A business entity that provides financial protection and compensation for losses in exchange for payment of premiums.

Premium

The amount paid for an insurance policy or the charge for accepting a higher risk in financial transactions.