A Pay-Fixed Interest Rate Swap Can Be Viewed as Equivalent

question 52

Multiple Choice

A pay-fixed interest rate swap can be viewed as equivalent to

• A) A long position in a par valued FRN and a long position in a par valued fixed rate note.
• B) A long position in a par valued FRN and a short position in a par valued fixed rate note.
• C) A short position in a par valued FRN and a long position in a par valued fixed rate note.
• D) A short position in a par valued FRN and a short position in a par valued fixed rate note.
• E) None of the above.

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Definitions:

Selling at Par

Selling at par refers to the condition where a security is sold at its face value, not at a discount or premium.

Call Provision

A clause in a bond's contract that allows the issuer to repurchase and retire the debt before its maturity date, usually at a premium price.

Bond Issuer

An entity, often a corporation or government, that issues debt securities to raise funds.

Fisher Effect

A theory proposing that the real interest rate is equal to the nominal interest rate minus the expected inflation rate, emphasizing the relationship between inflation and real and nominal interest rates.