Answer-first summary for fast verification
Answer: b) I. and II. Only
### Evaluate each statement **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**.
Author: Manit Arora
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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.
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