Consider a situation where the duration of the fixed portion of a swap is greater than the floating portion of a swap.Which of the following statements is most correct?
A)The fixed-rate payers gain when rates fall.
B)The market value of fixed-rate payments will decrease by more than the market value of floating-rate payments when interest rates fall.
C)The market value of fixed-rate payments will decrease by more than the market value of floating-rate payments when interest rates rise.
D)The floating-rate payers gain when rates rise.
E)The market value of the swap will increase with an increase in interest rates.

Question

Quizplus · Accepted Answer

When interest rates rise, the market value of fixed-rate payments decreases because the fixed payments become less attractive compared to the new higher rates available in the market. Since the duration of the fixed portion is greater than the floating portion, the impact on the fixed-rate payments is more pronounced, leading to a larger decrease in their market value compared to the floating-rate payments.

Consider a Situation Where the Duration of the Fixed Portion