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Basic Question 2 of 8
Which of the following strategies is (are) appropriate?
II. If an investor has floating rate assets and is expecting interest rates to rise, then the investor should enter into a swap in order to receive fixed and pay float.
III. If a borrower has floating rate debt and is expecting interest rates to rise, then the borrower should enter into a swap in order to receive float and pay fixed.
IV. If an investor has fixed income assets and is expecting interest rates to drop, then the investor should enter into a swap in order to receive float and pay fixed.
I. If a borrower has a fixed rate debt and is expecting interest rates to rise, then the borrower should not enter into a swap.
II. If an investor has floating rate assets and is expecting interest rates to rise, then the investor should enter into a swap in order to receive fixed and pay float.
III. If a borrower has floating rate debt and is expecting interest rates to rise, then the borrower should enter into a swap in order to receive float and pay fixed.
IV. If an investor has fixed income assets and is expecting interest rates to drop, then the investor should enter into a swap in order to receive float and pay fixed.
User Contributed Comments 10
| User | Comment |
|---|---|
| jmcgui10 | People! How is I right? If i am a borrower, I pay 6% per annum on my loan and I expect interest rates to rise to 7% why would I offer to swap my fixed 6% to pay a floating 7%???????? |
| achu | That's the point, I says NOT to enter into a swap if you have the fixed rate. I is correct. |
| jwebbs | i know im gonna miss a shitload of questions just because i misread them. balls |
| CheeHong | But what's stopping 1 from going into a swap to pay fix rate and get floating since we know the interest rate is rising? Then the net could be used to paydown the original fixed rate debt. |
| giroth | Yeah, couldn't we enter into a swap to pay fixed, receive floating? It doesn't say which side of the swap we're on. |
| tabulator | The purpose of a swap is hedging. If the borrower is so damn sure the rate will rise, he should go and speculate instead of swaping. Why the heck would he even care to pay a fixed to anyone? Moreover, if the borrower enters into a swap CheeHong advised, and the rate would NOT rise, he'd find himself paying the counterparty on the swap in addition to repaying his debt at a fixed rate... |
| Oarona | remember that these are zero-sum games. So 1 is correct because if interest rates are going to increase you are better-off leaving things as they are. |
| johntan1979 | That's right... you have a FIXED rate... you're already protected from rising rates, in a sense. |
| Shaan23 | You guys will understand better if you compare I and III. I we already have a fixed rate while interest rates are rising so DONT do anything. III we have a floating rate and interest rates are rising. Bad. Switch to Swap. |
| JNW1980 | For I think about having a fixed rate mortgage and then a bunch of inflation comes afterwards. The underlying house will likely increase with the inflation but your mortgage will lose value (in real terms) because it's fixed. |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
describe how swap contracts are similar to but different from a series of forward contracts
contrast the value and price of swaps
CFA® 2025 Level I Curriculum, Volume 5, Module 7.