In a Fixed Notional Equity-For-Floating Interest-Rate Swap,the Theoretical Fair Swap

question 7

Multiple Choice

In a fixed notional equity-for-floating interest-rate swap,the theoretical fair swap spread (the spread over Libor paid by the equity return receiver) is

• A)Greater than zero because equity returns are generally higher than Libor rates.
• B)An increasing function of equity market volatility.
• C)A decreasing function of expected equity market returns.
• D)Zero.

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Definitions:

Equilibrium Interest Rate

The interest rate at which the demand for funds equals the supply of funds, balancing savings with investment in the economy.

Loanable Funds Demanded

The total amount of funds sought after by borrowers in the financial market at a given interest rate.

Interest Rate

The percentage of an amount of money charged for its use per period of time.

Investment Projects

Initiatives requiring capital investment aimed at generating economic returns over time, such as infrastructure development, real estate, or new product development.