Question

In an interest rate swap, BBB wishing to convert floating rate investment to fixed-rate investment. Will...

  1. In an interest rate swap, BBB wishing to convert floating rate investment to fixed-rate investment.
  1. Will pays fix and receive floating for the term of the swap contract
  2. Will receive fix and pay floating rate for the term of the swap contract
  3. Such a swap not possible
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Answer #1

BBB has a floting rate return on his investment

he want to convert this into a fixed rate investment

to convert this he will have to enter into a pay floating and recieve fixed swap contract

by entering into the contract following cash flows will occur

1. BBB will get floting rate retun on investment

2. BBB will pay floting rate retun on the swap contract

3. BBB will recieve fixed rate return on the swap contract

Net effect of 1&2 will be zero and in effect BBB will recieve fixed rate return on investment

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