A security known as an interest-rate swap can be modeled as a portfolio consisting of either (i) a long position in a floating-rate bond and a short position in a fixed-rate bond (a payer swap) or (ii) a long position in a fixed-rate bond and a short position in a floating-rate bond (a receiver swap).2 Briefly explain: The

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A security known as an interest-rate swap can be modeled as a portfolio consisting of either (i) a long position in a floating-rate bond and a short position in a fixed-rate bond (a payer swap) or (ii) a long position in a fixed-rate bond and a short position in a floating-rate bond (a receiver swap).2 Briefly explain: • The price of the swap when the swap is created. • How changes in the yield curve after the swap is created result in changes to the swap price. A security known as an interest-rate swap can be modeled as a portfolio consisting of either (i) a long position in a floating-rate bond and a short position in a fixed-rate bond (a payer swap) or (ii) a long position in a fixed-rate bond and a short position in a floating-rate bond (a receiver swap).2 Briefly explain: • The price of the swap when the swap is created. • How changes in the yield curve after the swap is created result in changes to the swap price. A security known as an interest-rate swap can be modeled as a portfolio consisting of either (i) a long position in a floating-rate bond and a short position in a fixed-rate bond (a payer swap) or (ii) a long position in a fixed-rate bond and a short position in a floating-rate bond (a receiver swap).2 Briefly explain: • The price of the swap when the swap is created. • How changes in the yield curve after the swap is created result in changes to the swap price.

Expert Answer

1. The price of the swap when the swap is created: The price of an interest-rate swap at inception ( View the full answer