Explanation:
I. True. The market swap rate is commonly quoted as the mid-market rate, i.e., the average of bid and offer fixed rates.
II. True. The par swap rate is the fixed rate that makes the swap value zero at initiation.
III. False. The swap rate typically lies between the borrowing and lending rates of a high-quality counterparty: it is usually higher than the borrowing rate but lower than the lending rate. As written, this statement is not correct.
IV. False. A swap rate is not a pure risk-free rate; it is often used as a proxy, but it reflects market conditions and credit/liquidity considerations.
Therefore, the true statements are I and II only.
Correct answer: B.
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Q-175.4. Consider four statements about the 5-year swap rate:
I. The 5-year swap rate is the average of the bid and offer fixed rates that a market maker is prepared to exchange for LIBOR in a standard plain vanilla 5-year swap
II. The 5-year (par) swap rate is the 5-year LIBOR/swap par yield; i.e., the fixed rate that makes the value of the swap equal to zero
III. The 5-year swap rate should be greater than the 5-year AA-rated borrowing (lending) rate
IV. The 5-year swap rate is a pure riskfree (riskless) rate
Which are TRUE?
A
a) I. only
B
b) I. and II. Only
C
c) II., III. and IV
D
d) I., II., III., and IV.