CFA Practice Question

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CFA Practice Question

First National Bank finds itself in a situation where it is receiving fixed rate income from its loan portfolio and must pay floating rate expenses to its depositors. Which of the following plain vanilla interest rate swap payments would be of interest to the bank?

I. First National makes fixed rate payments
II. First National makes floating rate payments
III. First National receives floating rate payments
A. II only
B. III only
C. I and III
Explanation: Choice A would match fixed rate payments with the bank's fixed rate income. Choice C would match floating rate income with the bank's floating rate payments.

User Contributed Comments 7

User Comment
sharon swap
ilic26 why, explain more
armanaziz The company is in risk that if its floating rate expenses increase above the fixed rate income - it'll incur loss.

Now by making fixed rate income the company's income gets reduced by a fixed rate but may still be above its current expense level - where as the floating rate received would compensate for any increase in the floating rate expense.

Thus the company locks a fixed % profit and eliminates / reduces the risk of loss.

faya Should this not be 'd'? Both I and III remove the floating /fixed risk...
kishankolli Answer is 1 & III , By doing this swap i.e recieve floating and pay fixed with any bank or any other party , The risk has been hedged.

So Answer is D
steved333 I guess if bank receives floating, it will still be above what it pays...
Shaan23 Without explaining just know that in an interest rate swap one side always pays fixed and the other floating, or both sides pay floating but NEVER do both pay fixed.
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