I took the schweser live exam yesterday and once of the questions talks about a company having a taken out a floating rate loan (LIBOR + 200 BPS). So he enteres into a swap to recieve floating and pay fixed.
The question asks if his Cash Flow risk and increased or decrease
and if his Market Value risk has increased or decrease.
I understand his cashflow risk has decreased because he now locked in a fixed rate, but It also says market value rish has increased which I dont understand.
I would have thought that since he is borrowing money (issued a bond), and now is receiving floating and paying fixed his market value risk would decrease as well? because i know when you recieve fixed your duration increases leading to increase in market value risk, but as a borrowing of funds you don’t hold the security, you’re the issuer of the security so the market value risk is attached to the investor of the funds (the lender)
Can someone help me figure this out?
The question asks if his Cash Flow risk and increased or decrease
and if his Market Value risk has increased or decrease.
I understand his cashflow risk has decreased because he now locked in a fixed rate, but It also says market value rish has increased which I dont understand.
I would have thought that since he is borrowing money (issued a bond), and now is receiving floating and paying fixed his market value risk would decrease as well? because i know when you recieve fixed your duration increases leading to increase in market value risk, but as a borrowing of funds you don’t hold the security, you’re the issuer of the security so the market value risk is attached to the investor of the funds (the lender)
Can someone help me figure this out?