Question

An interest rate swap can be interpreted as a position in two cash market instruments. What...

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

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Answer #1

In an interest rate swap a floating rate of interest swapped for a fixed rate of interest. This means that the buyer would get a fixed rate of interest whereas he would make a payment for floating rate interest. The floating rate can be determined based on LIBOR or any such rate.

An interest rate swap can be interpreted as a position in two cash market instruments. From a buyer's perspective they are-

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

Do let me know in the comment section in case of any doubt.

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