Question

Looking at an Interest Rate Swap on a 10 year floating rate corporate loan portfolio and a Credit Default Swap on a fixed rate 10 year corporate bond portfolio, which will give a higher yield? Why?( points)

Answer 1

Answer-

The Credit Default Swap on a fixed rate 10 year corporate bond portfolio will have higher yield than Interest Rate Swap on a 10 year floating rate corporate loan portfolio.

Interest rate swaps on a 10 year floating rate corporate loan portfolio are safer and locked into a less favorable interest rate where as Credit default swaps on a fixed rate 10 year corporate bond portfolio carry more systemic risk which carries higher risk and thus gives higher yields.