Question

An interest rate swap can be interpreted as a position in two cash market instruments.  What are they from the buyer’s perspective?   

____

A)        A long-side of a floating-rate bond and a short position in a fixed-rate bond

B)        Purchasing a fixed-rate bond and issuing at a floating-rate

C)        Going long and short simultaneously in a floating-rate bond

D)        Buying a long-term bond and financing with a short-term bond

Answer 1

Wherever we talk about a swap, we talk in terms of fixed rate. So if we want to take the buyer's perspective, the buyer is buying the fixed rate position in the swap. In exchange he is selling the floating rate position. Option B is correct because of this reason.

As option B is correct it automatically means A is incorrect because it states the opposite of B

One leg of a swap is generally fixed so both legs being floating as implied by option C is incorrect.

Both bonds need to be of the tenure as long as that of the swap's maturity. Beyond that, how many years remain to their maturity is not a concern, so either can be short or long term bond. This makes option D incorrect